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Master’s Thesis of Minji Jung

Analyzing China’s One Belt, One Road initiative – based on the

framework of “Internationalization of Domestic Development”

“국내개발의 국제화” 프레임워크에 입각하여 분석한 중국의 일대일로 정책

August 2017

Graduate School of Seoul National University

International Cooperation, GSIS

Minji Jung

    ii  

Abstract China has gradually opened its borders to the international market since the economic reform of 1978,

and differences in the relative values of goods and services inside and outside the country resulted in a

tremendous economic growth for China. Other benefits deriving from global transaction made China

gain greater global links. Since then, foreign interest in China’s market has changed dramatically.

China is now less mercantilist and more comfortable with lowering the barriers to global market

forces. It has moved beyond partial integration to adjust its external behavior, and now strives to

become an influential leader, creating a new and improved international system. China’s

internationalization process has been, and still is very much state-centric, yet it has been slowly

adapting itself to the liberalized market forces towards becoming a mixed economic system- a

marketized economy combined with an authoritarian political structure.

Now that China is implementing the One Belt One Road Initiative, a new blueprint for global

economic development in countries and regions from Asia to Europe and reaching as far as Africa, we

need to reevaluate and redefine China’s internationalization. Despite being advertised as a global

strategy with inclusiveness and openness, OBOR should be viewed as broadening the scope of China’s

domestic strategy. Using the internationalization of domestic development framework, in this paper I

aim to systemize China’s pattern of domestic development leading to OBOR to determine how and

why OBOR was implemented as an external instrument to assist in the necessary domestic rebalancing

process, furthering China’s internationalization. Examining China’s economic reform in sequential

order along with its domestic developmental policy such as Special Economic Zones (SEZs), the Great

Western Development Strategy, and implementation of State Owned Enterprises(SOEs), I divide the

process into three stages and analyze them.

Finally, I conclude the thesis by identifying the implications of OBOR and China’s new found role in

the global market. However, as it is an initial stage of OBOR’s implementation, further research is

needed to estimate any clear and concrete consequences of China’s systemic progress.

Keyword: OBOR, China, Internationalization, Globalization Student Number: 2011-22380

    iii  

Table of Contents List of Abbreviation ……………….…………………..……………………………………1 I. Introduction …………………….……………………………………………………2 1. China’s Economic Transformation- From its “opening up” to OBOR………….4 2. China Today ……………….……………………………………………………6 3. The Internationalization of China ………………….……………………………..9 II. Literature Review and Background …………………... ………………………….11 1. Internationalization ……………..………………………………………….14 2. Internationalization: the Case of China ……………….………………………..15 III. China and the Development of OBOR and the Asian Infrastructure Investment Bank ……………………………………………………...…………………………………20 1. Domestic Economic Needs …………………...…………………………………20 2. International Economic Needs ……………...…………………………………22 IV. Internationalization of Domestic Development ………………..……………….29 1. Studies on the Convergence Level and Disparity of Regional Growth in China …………………………………….…………………………………………………..31 2. Stages of Internationalizing the Domestic Development ……………………….33 2.1 Stage 1: China’s Opening-up Policy ……………………….………………………..33 2.2 Stage 2: Great Western Development Strategy: Economic Zones –Resolving Internal Issues ………………………………………….……………………………..…………….39 2.3 Stage 3: Implementation of OBOR – Overcoming the Limitations of the Great Western Development Strategy ………………………………………….……………..43 3. The Internationalization of the RMB, and the Role of the AIIB ……………...47 V. Conclusion …………………….…………………………………………………..51 Bibliography ……………………….…..........................................................................54 Abstract in Korean …………………..……………………………………………….57

    1  

List of Abbreviations

 

ADB   Asian  Development  Bank  AIIB   Asian  Infrastructure  Investment  Bank  APEC   Asia-­‐Pacific  Economic  Cooperation  CCP   Chinese  Communist  Party  ETDZ   Economic  and  Technological  Development  Zone  FDI   Foreign  Direct  Investment  FIEs   Foreign-­‐Invested  Enterprises  GDP   Gross  Domestic  Product  GWD   Great  Western  Development    HK   Hong  Kong  IMF   International  Monetary  Fund  JV   Joint  Venture  MDB   Multilateral  Development  Bank  MNE   Multinational  Enterprise  NPC   National  People's  Congress  OBOR   One  Belt  One  Road  

OECD  Organization  for  Economic  Co-­‐operation  and  Development  

PBOC   People's  Bank  of  China  RMB   Renminbi  SEC   State  Economic  Commission  SETC   State  Economic  and  Trade  Commission  SEZs   Special  Economic  Zones  SOEs   State-­‐Owned  Enterprises  SPC   State  Planning  Commission  TNC   Transnational  corporation    TPP   Trans-­‐Pacific  Partnership  TVEs   Township  and  Village  Enterprises  WB   World  Bank  WTO   World  Trade  Organization  

 

    2  

I.   Introduction

 

The unprecedented pace of change in China was initially driven by its economic shift towards a

more open, market-oriented economy, and later by its deeper integration into the world economy.

Originally a recipient country of foreign aid from various international organizations, China has now

become a leading global economy and an important player in foreign assistance. China has evolved to

adopt a liberal market economy through the internationalization process. This goes against its

ideological nature, and many scholars have debated how the country’s economy might evolve in the

future. Now, with the One Belt, One Road (OBOR) initiative, China is trying to set another landmark

in economic diplomacy with profound long-term implications. This initiative was first proposed in

September 2013 by China’s president Xi Jinping, to establish a modern equivalent of the Silk Road,

creating the world’s largest platform for economic cooperation. The scale of this initiative is as big as

participation of 100 countries and international organizations, according to Xi Jinping during his

speech at the symposium on the Belt and Road Initiative in Beijing. The OBOR initiative is the

country’s most significant initiative by far, and has seen the setting up of a 40 billion USD Silk Road

Fund. OBOR is in line with the message of creating a deeper integration with the world economy,

which shows China’s stance on internationalization. China is optimistic about its OBOR initiative,

claiming this 21st century Silk Road connectivity will first make the country’s economy grow and

create advantages for the relevant states or economies by closely integrating them with the Chinese

economy, ultimately to link up different parts of Asia and create several mega-continental bridges

forming one economic entity.

As successful as China’s economic growth, for China to grow within the scope of

internationalization, however, its leaders needed to make difficult reforms. Reforms such as that of

state-owned enterprises (SOEs); open up the country to private-sector competition; lower the barriers

of government protected service sectors to private and foreign competition; and liberalizing the

financial sector. Such change often requires the regime to surrender much of its power to direct

economic activity, which might jeopardize it. This is why many of participants are still questioning the

motivation behind China’s OBOR. All in all, the implementation of OBOR and its success are

dependent on legitimizing the political regime further, while adjusting the economic structure. Now

that China is implementing its domestic strategy for a new era of economic development and

    3  

increasingly opening up to the outside world, i.e. the OBOR initiative, we need to reevaluate and

redefine the country’s internationalization.

China has been gradually reforming itself to achieve a socialist market economy and improve its

modern economic system. China will continue to pursue its basic policy of opening-up, and at the

same time committing to a new and improved pattern of all-round opening-up, and integrating itself

deeper into the market system. Through the implementation of the Belt and Road, China is trying to

change its developmental direction from mere expansion to improving operations management and

enhancing global competitiveness. Despite being advertised as a global strategy with inclusiveness and

openness, however, OBOR should be viewed as broadening the scope of China’s domestic strategy. I

call this process the “internationalization of domestic development,” turning specific economic

projects into economic collaboration projects with OBOR countries. The initiative is undeniably

important to China’s growth prospects, and will enable China to explore the effects of

internationalization on national economies and its growth in the proportion of international economic

flows relative to domestic ones. This paper’s main focus is to analyze OBOR based on the framework

of the internationalization of domestic development, and in doing so, to answer to following question:

What does internationalization mean to China, now that it is no longer a recipient state, but instead a

global market leader and donor state? How is China going to pursue its internationalization process

further and what are their plans? How should we systemize this process so that we can properly access

its current status and predict the future behavior?

Thus, this paper attempt to analyzes China’s internationalization in line with its domestic

development policies, leading up to the “OBOR” initiative, which represents the country’s new

approach to internationalization. This can give us a big picture of China’s economic transformation

and the future they envision whether it is for themselves or for the better of all, I believe we need to

pay more attention to China’s development objectives over the past years in relation to its motivation

behind put forth for internationalization. The objective of this paper is discussed in greater detail

shortly, but first it is necessary to place China’s internationalization process in context. The following

section aims to systemize China’s internationalization process by examining the historical background

of China’s developmental stage, beginning with the 1978 opening-up and leading up to the 2000

western development stage to reduce the gap between regions; and finally the establishment of AIIB

    4  

with OBOR and the internationalization of the Chinese Yuan Renminbi (RMB) to broaden its political

and economic scope, making China the leader of today’s market economy.

1.   China’s Economic Transformation – From its “Opening-Up” Policy to OBOR

 

Initially a closed communist economy, China took a gradual approach towards internationalization;

this process was strictly internally determined, downplaying financial integration and global

governance. It is important to note that domestic demand was the key focus of China’s economic

policy throughout its entire reform process. It was critical for China to focus on its domestic demand-

comprised of personal and household consumption, domestic investment, and government spending-

as a source of economic growth. This is not surprising, considering that China is a huge continental

economy with one-fifth of the world’s population. 1

Throughout China’s internationalization, the level of deregulation and decentralization has changed,

but domestic demand has remained the key factor in determining its economic policy. OBOR, despite

being advertised as a “win-win” strategy for member countries by removing transport bottlenecks and

promoting transport connectivity between related regions, also provides the perfect economic platform

for specific regions in China. Projects from the OBOR initiative involve various western and coastal

regions as strategic ports of the Belt and Road mega-continental bridges, linking different parts of

Asia. One of the major objectives is the Silk Road connectivity for these regions, which are less

developed compared to urban areas and which received preferential treatment at the beginning of the

reform period, to take economic advantage of the new projects. Additional components connecting

China’s domestic policy with OBOR are discussed in the following chapters.

Since the 1978 opening-up initiated by Deng Xiaoping, China has slowly adapted itself to the outside

world, showing significant economic prosperity. China changed its autarkic relationship with the

international system, becoming a country that is highly engaged in global commerce and fairly active

in transnational exchanges of all types.2 Its gradual shift from a closed and planned economy to a

                                                                                                                         1 Yang, Lim Tin Seng. 2009. “China’s Approach to Tackle the Economic Slowdown: The Role of the Government” In REGIONAL POLITICAL ECONOMY OF CHINA ASCENDAN: Pivotal Issues and Critical Perspectives, edited by Emile Kok-Kheng Yeoh, 37-54. University of Malaya, Institute of China Studies.  2 Zweig, David. 2002. Internationalizing China: domestic interests and global linkages. Cornell University Press.

    5  

market economy, increasing its global economic power, gained the world’s attention. The 1978 policy

change was the result of the strong pressure of international economic factors, and the fact that China

still managed to gradually approach reforming its foreign trade administration is quite remarkable.

Chinese leaders were able to remove regulatory constraints from specific regions while managing to

maintain those controls over other localities. This level of openness, of which the regions took

advantage, was determined solely by the central government, and its policies and initiatives were

implemented based on its plan and not on the market economy. This was highly different from what

liberalists might have expected the country’s reaction to internationalization and market economy to

be. Many scholars have defined Chinese characteristics of internationalization as “elite driven,”

“economic nationalist”3 (Susan Shirk, 1996), and “particularistic contracting” (David Zweig, 2002).

Over the decades, however, as China’s transnational exchanges have expanded, international forces

and local demand have pushed the country into a more interdependent, and more market-oriented,

global system. With its membership in the World Trade Organization (WTO) and other major

international organizations, such as the World Bank and Association of South-East Asian Nations

(ASEAN), China has not only become an integral part of the world community, but has also placed

itself among the most influential players in the global market. Global markets continue to drive down

regulatory barriers in China, and the latter is becoming more comfortable with the idea of a market

economy. Yet the basic characteristic of a regulatory regime remains, and bureaucrats who supported

the internationalization simply because it brought them income and opportunities still manage to

remain in a communist regime country in a political sense.

Various studies have examined internationalization and China’s economic reforms. Neoliberalists

such as Frieden and Rogowski argue that internationalization affects countries’ policy preferences

regardless of domestic structure.4 Their argument cannot account for China’s domestic structure and

how their localities responded to international opportunities, because it is not just a comparative

advantage caused solely by internationalization. The East Asian model of development argues that

bureaucrats are not rent seekers, but instead are “enlightened directors of industrialization who manage

the market and successfully promote development.” 5 However, China showed different path during

                                                                                                                         3 Shirk, Susan L. 1996. “Internationalization and China’s Economic Reforms” In INTERNATIONALIZATION AND DOMESTIC POLITICS, edited by Robert O. Keohane, Helen V. Milner, 186-206. Cambridge University Press. 4 Keohane, Robert O. and Miler, Helen V. 1996. INTERNATIONALIZATION AND DOMESTIC POLITICS. Cambridge University Press.    5 Robert Wade, 1990. Governing the Market: Economic Theory and the Role of Government in East Asian Industrialization, Princeton: Princeton University Press.

    6  

the Maoist era. The necessity for successful late industrialization become increasingly avaricious,

expending enormous energy on seeking rents. Zweig(2002) argues that in democracies, domestic

pressures (democracies, lobbies, independent trade unions, etc.) possess the legal authority to pressure

the government to alter its trade regime. In authoritarian systems such as China, however, even the

collective interests are clarified, even if the action is not illegal, it is difficult to pursue. Despite the

Chinese government deciding to reject autarky and expand transnational exchanges, bureaucrats have

remained in control of many international transactions. Yet the groups that benefit from transnational

links can undermine strong authoritarian regimes once they are open to the outside world, ultimately

changing China’s policy building (Zweig 2002).

2.   China Today

 

For the past few decades, China has grown sufficiently to become a new donor. The Chinese

economy has risen rapidly over several decades, surpassing Japan in 2010 and becoming the second

economy in the world. By the end of December 2016, China’s foreign exchange reserves reached USD

3,010.5 billion, the largest in the world, and in 2015 its total external trade reached USD 3,956 billion,

ranked first in the world.6 Despite suffering from an economic slowdown (due to the rapid rise in labor

costs and market saturation in China’s petrochemical, steel, and other basic industries), China remains

the single largest contributor to world gross domestic product (GDP) growth. China recorded 9.3% of

growth in 2011, moved down to 7.7% in both 2012 and 2013. In a similar vein, in 2014 and 2015, its

GDP was up by 7.3% and 6.9%, respectively. And in 2015, its per capita GDP reached RMB 49,351.

Moreover, in the first three quarters in 2016, its GDP grew 6 % and 6.8% in the last quarter, which in

overall average growth of 6.7%.7 The world is watching China’s growth very carefully because its

influence on the global economy is growing, perhaps more so than U.S acknowledges.

Despite its general satisfaction with the its economic performance, and optimism about its economic

future, China does face some internal challenges. The regional development gap within China,

between coastal and middle/western regions, and between urban and rural areas, has been a focal issue

for the government. Specifically, middle and western China account for 80% of land and 60% of

                                                                                                                         6 The National Bureau of Statistics, Ministry of Commerce, and General Administration of Customs. 7 The National Bureau of Statistics, Ministry of Commerce.  

    7  

population, but collect only 14% of foreign trade, 17% of foreign direct investments (FDI), 22% of

overseas investment, and one-third of GDP. The domestic pressure to reduce the poverty rate and

growing resentment over income and wealth inequality among people and regions is pushing China to

find a new strategy – a strategy to expand its sphere of international influence both politically and

economically, and to establish its internal and external regional hegemony.

One Belt, One Road

Since its official launch by President Xi Jinping at the Asia-Pacific Economic Cooperation (APEC)

Summit in Beijing in October 2014, the OBOR initiative, or more specifically China, has made

significant progress. China has signed OBOR cooperation agreements with countries along the Belt

and Road, and with the establishment of the Asia Infrastructure Investment Bank (AIIB), OBOR

infrastructure projects have begun to be implemented. Fifty-seven countries signed up as the

initiative’s founding members, including European countries, such as the UK and Germany.

Internationally, China joined the European Bank for Reconstruction and Development in January

2016, allowing it to participate in projects in Europe. Domestically, 31 provinces have made plans to

engage in OBOR, and China has expanded its free trade zone trial to 11 provinces to accelerate the

development of the initiative.

OBOR connects Asia to Europe all the way to Africa by land and maritime transportation. The aim

of this modern version of the Silk Road is to facilitate economic interaction between its member states

and, as a result, for them to benefit from the increased trade. Xi Jinping believes that the

implementation of the OBOR in long run can improve road communication, thus enhance trade flow,

encouraging currency, alternately increase the interaction between people. China seems to be

confident that this new Chinese version of the Silk Road will open a gateway to development

cooperation using a regional cooperation platform to proceed with freeways, high-speed railways,

trade and investment, energy cooperation, regional integration, and network interconnection. Xi has

also made several remarks about how OBOR initiative is “an open, diversified, win-win project poised

to bring huge opportunities for the development of China and other countries.” To verify such

confident, many countries have lined up to join or shown interest in the initiative by joining the AIIB

or through various forms of cooperation.

    8  

According to a report by Minsheng Securities, the OBOR strategy will boost China’s GDP growth by

0.25%. The report further speculates that this strategy will cover 4.4 billion people from 26 countries

and regions, valuing the economic effect at USD 21 trillion. China set up a Silk Road Fund of USD 40

billion, and further invested USD 50 billion as start-up capital to establish the AIIB. China has formed

economic cooperation zones with more than 50 regions along the Belt and Road route, expanding its

free trade zones trial from four to seven provinces. The initiative has also accelerated China’s shift,

making it a major capital exporter whereas it used to be the world’s biggest goods exporter. China’s

outbound direct investment (ODI) surpassed its FDI for the first time in 2015, and its ODI to countries

along the OBOR grew by 23.8% Year On Year (YOY) in 2015.

In the first quarter of 2017, China’s trade with economies along the Belt and Road initiative marked

double-digit growth YOY8. Moreover, the ministry’s spokesman Sun Jiwen says trades in goods

between China and the Belt and Road economies increased by 26.2% in the first three months from

the same period of last year. Jiwen has also stated that due to the significant progress made in

infrastructure projects, China’s products and services have gained more popularity. During the first

quarter, China’s non-financial ODI in 43 economies in the Belt and Road regions reached US$ 2.95

billion, taking up 14.4% of the country’s total ODI, according to data from the Ministry of Commerce.

These figures and the fact that trade between China and countries along the OBOR routes exceeded

USD 1 trillion in 2015, a quarter of China’s total trade value, show that the OBOR initiative has

boosted trade and investment in China considerably, and will continue to increase their value. By

2020, the initiative will have boosted cumulative non-financial ODI to USD 2 trillion.

3.   The Internationalization of China

Keohane defines internationalization as expanded flows of goods, services, and people across state

boundaries, thereby increasing the share of transnational exchanges relative to domestic ones.9 Along

                                                                                                                         8  Data form the Ministry of Commerce, People’s Republic of China, 2017. http://english.mofcom.gov.cn

 9 Keohane, Robert O. and Miler, Helen V. 1996. INTERNATIONALIZATION AND DOMESTIC POLITICS. Cambridge University Press.

    9  

with a decline in the level of regulation affecting those flows, many sectors in China’s society and

economy have become increasingly internationalized (Table 1.1).

Table 1.1: Internationalization of China

Year 1978 1980 1982 1984 1986 1988 1990 Total foreign trade (billion $) 20.6 38.1 41.6 53.5 73.8 99.8 115

Total exports (billions $) 9.8 18.1 n.a. n.a. 30.9 47.5 62.1 Exports by foreign-invested firms (billion $) n.a. n.a. n.a. n.a. 0.48 2.46 7.8

Exports by foreign-invested firms (% total exports)

1.6 5.2 12.6

Year 1992 1994 1996 1997 1998 1999 2000 Total foreign trade (billion $) 166 237 290 325 324 360.6 474.3

Total exports (billions $) 84.9 121 151 183 184 195 249 Exports by foreign-invested firms (billion $) 17.4 34.7 61.5 74.9 80.9 88.6 119.4

Exports by foreign-invested firms (% total exports) 20.5 28.7 40.7 40.9 44 45.5 48

source  1:  China  Statistical  Yearbook,  1978  to  1994.

If internationalization process is shaped by domestic political and economic structures, how can we

explain the Chinese case of internationalization? China remains an authoritarian state even after

opening its economy to international forces. How is China planning to integrate itself deeper into the

global market, to increase its benefit, while retaining its political control and without jeopardizing its

image?

The remainder of this paper is organized as follows. First, Chapter 2 discusses the recent literature on

relevant models of internationalization, as well as the literature on domestic-international links that

affect the forming of domestic policies, especially in the case of China. Here, I take David Zweig’s

explanation of China’s internationalization, emphasizing not only the role of the global market force,

but also that of state leaders and domestic actors in the process, and I develop his idea of a Chinese

pattern of transnational links to fit the current developmental policy strategy. Chapter 3 then analyzes

the OBOR initiative and attempts to determine whether China and the rest of the world need the

initiative and why. The chapter is divided into four sub-sections: Domestic Need; International Need;

Strategy Behind the AIIB; and the OBOR Initiative and Connection to AIIB. In Chapter 4,

Internationalization of Domestic Development, I examine China’s pattern of domestic development

leading up to OBOR, to see how and why OBOR was implemented to serve as an external instrument

to assist in the necessary domestic rebalancing process, furthering China’s internationalization.

Finally, I conclude the paper by deriving the implications of OBOR and China’s new found role in the

global market.

    10  

II.   Literature Review and Background

 

Over the past few decades, rapid internationalization has refocused scholarly attention on the role of

the state. Scholars have argued about the impact of globalization on the state, with the dominant view

being that globalization weakens the latter’s power. The most classical theories that discuss the

relationship between the state and the effect of globalization are the neo-Marxist and neoliberal

arguments.10 More than a century ago, Marx noted that Capitalism knows no bounds, and this is

accurate if we look at the current market system and its effect on state boundaries. In his world-system

analysis, Immanuel Wallerstein gives us a contemporary version of the Marxist theory of the link

between capitalism and globalization.11 Moreover, more contemporary scholars, such as Kenichi

Ohmae, Mathew Horseman, Andrew Marshall, and Susan Strange, have focused on the diminishing

role of the state in the age of internationalization.12 13 This argument about the “de-nationalization” of

economies through the establishment of transnational networks of production, trade, and finance

(David Held and Anthony McGrew, 1999) tries to explain how state and market interact in both

international and domestic zones.

Neoliberal scholars focus on the nature of interdependence among nation states, and thus the impact

of internationalization on state behavior in world politics.14 These scholars believe that radical

economic internationalization, which is above all nation states, has been established. Robert Keohane

and Joseph Nye argue that internationalization resulted in complicated system of interdependent states

where international institutions and their transnational rules have gained their influence. The

neoliberalists argue that while states hold the ultimate authority with its legal power to effective

supremacy over their own territories, with the jurisdiction if international governance and the

international law expanding, (Zheng, 2004), all states respond to international market regardless of

their national regime. The term “internationalization of domestic politics” in Milner and Keohane’s

(1996: 4) book is used to refer to a context in which one or more features of domestic policy-making,

agenda setting, priority determination, choice of policy instruments, the content of public policies, and

                                                                                                                         10  Zheng,  Yongnian.,  2004.  Globalization  and  State  Transformation  in  China.  Cambridge:  Cambridge  University  press.  11  Immanuel  Wallerstein.,  1979.  The  Capitalist  World-­‐Economy.  Cambridge:  Cambridge  University  Press.    12  Kenichi  Ohmae,  1995.  The  End  of  the  Nation  State.  New  York:  Harper  Collins.    13  Susan  Strange,  spring  1995,  “The  Defective  State”  Daedalus,  special  issue  “What  Future  for  the  State?”,  124:2,  p.56.    14  Zheng,  Yongnian.,  2004.  Globalization  and  State  Transformation  in  China.  Cambridge:  Cambridge  University  press.  

    11  

the interpretive frameworks that guide policy-making are discernibly affected by factors that do not

originate in the domestic arena.

State and International system

According to the above arguments, internationalization has led to the decline of state power and made

it difficult for the national state to control civil society, which could make an authoritarian regime

vulnerable. Such regimes often exercise tight political control over domestic economic transactions.

What does this mean for authoritarian states such as China? How would China interpret this argument

about internationalization challenging its state power? To answer this question, we first need to review

the current studies on how states interact with the international market system.

Today, domestic politics occur in a context of internationalization. There are four relevant models to

understand the process by which states interact with the international system: 1) the regulatory control

model, which focuses on the regulatory regimes where they control the level of interaction in world

market; 2) the neoliberal model, which concerns the effect and the power of international forces

domestic level; 3) the East Asian model, focusing on the role of “enlightened bureaucrats” who

manage to successfully promote development in East Asia; and 4) the network capital model, which

emphasizes the role of network capitalism(Zweig, 2002). These models are discussed in more depth in

the following.

The regulatory controls model addresses the level of administrative constraint in the domestic

economy, with the state power to control the level of transnational exchanges. It argues that political

and economic institutions limit internationalization changing the effects of the international and

domestic markets. However, these assumptions cannot explain China’s shift to increased international

transaction and the rising role of market forces, nor the decreased regulatory controls since 1978. They

undermine the market forces that influence the regulatory constraints (Zweig, 2002).

Neoliberalists, whose arguments were outlined earlier in this section, also face limits in explaining

China’s internationalization. Unlike the regulatory control model, the neoliberal model emphasizes the

impact that international market forces have on domestic interest.15 This argument is not sufficient to

explain a country’s internationalization, however. Susan Shirk (1996) argues that China’s strong hold

                                                                                                                         15 Peter Gourevitch, Autumn 1978, “The Second Image Reversed: The International Sources of Domestic Politics,” International Organization 32: 881-911.

    12  

over external influence reaching domestic market prevented change in relative prices which is

different from what neoliberalists might expect. These institutions also undermined the role of elites,

holding strong control over determining which area would get preferential treatments to be opened to

international prices.16

The East Asian model of development argues that enlightened bureaucrats are not rent seekers, but

showed great management skill over the market and successfully promote development.17 However,

this model cannot explain the Chinese case either, because none of the other East Asian countries had

the near-Stalinist style of central planning when the reform period began, and kept such style of

command system after the reform. While some East Asian countries, such as Japan, South Korea, and

Taiwan, shared similar GDP growth rates, the macroeconomic beliefs in competitive market

conditions that are crucial for rapid economic growth, and even authoritarian regimes, and though

external competitiveness was important both in East Asia and in China, the policy direction to deal

with external competitiveness showed completely different pattern (Zweig, 2002). China tended to

focus more towards domestic pressure rather than the global ones, protecting its loss generating state

sector. This again was atypical pattern of behavior responding to internationalization. Until the late

90s, it was difficult to set a clear industrial policy, due to elite conflict, and the key growth sectors

were not centralized. This is different to the cases of South Korea and Japan, for instance, where

efficiency has come more from the strong state power pushing large corporations into the international

market for them to grow. In China’s case, efficiency has resulted from interprovincial competition

trying to get the preferential treatment from the central government.

As the fourth model, preferred by China’s scholars, asserts elite, domestic political, or network

explanations18 for the country’s post-Mao foreign economic policy. This model generally is less

focused on external factors such as global economics and their market forces, but stresses the role of

network capitalism to explain China’s internationalization. Jude Howell’s cyclical explanation of

China’s internationalization combines economic and political logic.19 Liberalization resulted in

                                                                                                                         16 Dorothy J. Soliger., 1991. From Lathes to Looms: China’s Industrial Policy in Comparative Perspective, 1979-198. Stanford: Stanford University Press.; Joseph Fewsmith, 1994, Dilemmas of Reform in China Armonk: M.E. Sharpe. 17 Robert Wade, 1990, Governing the Market: Economic Theory and the Role of Government in East Asian Industrialization, Princeton: Princeton University Press. 18 Thomas G Moore, 2002. China in the World Market, Chinese Industry and International Sources of Reform in the Post-Mao Era. Cambridge University Press. 19  Jude Howell, 1993. China Opens Its Door: the Politics of Economic Transition, Boulder: Lynne Rienner.

    13  

increased domestic demand for international resources, forcing the government to repress the domestic

and international transactions. Howell further claims that new beneficiaries of internationalization will

resist retightening, leaving China more open than at the beginning of the reform. However, the author

understates the role of foreign markets and the administrative interests in the process of China’s

internationalization.

1.   Internationalization To understand internationalization and how it is connected to the development in China, we need to

review previous studies. Many attempts have been made to define internationalization in the link

between domestic and international. We can no longer explain internationalization through relying

solely on either the international or the domestic structure. (Keohane 1996). This is especially true for

the Chinese case. We need to examine how China came to a decision to open itself up to the global

market. To this end, David Zweig incorporates the concept of “channels of global transaction,” i.e. the

incentives generated by the regulatory regime to open up, authorized by the state to control any

transnational exchanges. Keohane and Milner regard internationalization as “a process that can be

empirically measured by the growth in the proportion of international economic flows relative to

domestic ones.” Since economics and politics are so closely intertwined, there is reason to expect

profound political effects of economic policy as well: in particular, we should expect to see signs of

the impact of world economy in domestic politics in various countries around the world. In this vein,

the main proposition of Keohane’s argument is that it became almost impossible to approach politics

only within domestic level, without acknowledging comprehensive nature of national and the world

economy, and the changes in such connections (Keohane, 1996). Internationalization, as he refers to

“the processes generated by underlying shifts in transaction costs that produce observable flows of

goods, services, and capital”. In the past decades, the internationalization process such as currency

trade, international trade and investment has grown. Such process influence the economic actors in

dealing with opportunities and also constraints, and even their policy preferences.

Internationalization also increase their sensitivity and vulnerability to external changes, as it affects

the aggregate welfare of countries. The economic policies and political institutions changes as

incentives change through internationalization. In this vein, Frieden and Rogowski argue that

internationalization affects the policy preferences of actors in predictable ways, based on those actors’

    14  

economic interest.20 Most obviously, internationalization will increase the tradable sector within an

economy, which will then reduce the amount of economic activity coming from world market forces.

Ceteris paribus, in return, the sensitivity of national economies to world market trend should increase

through internationalization. Yet, one should not overlook the fact that each country will have

different regime and circumstance, thus their policies and institutions would also have different

effects. Thus, the second fundamental proposition of this argument is that political institutions can

alter the effects of internationalization. We must not undermine the power of political institution and

know that political outcomes cannot be predicted simply on the basis of economic interests. Coalition

formation depends on strategic judgments and maneuvering, and often cannot be predicted from

policy preferences alone. Moreover, policy decision on whether to stay with existing institution, or to

radically change the current status depends on external factors as well as strategic planning and

referential judgments.

2.   Internationalization: the Case of China China, as a Leninist Regime, is considered to be a difficult case in which to demonstrate the impact

of internationalization on domestic policy outcomes compare to other democratic-liberalist countries.

This is due to the dense institution of the Communist Party state preventing information about the

international economy from reaching domestic actors. When socialist systems operate under a one-

party political structure, managing a centrally planned economy, there are limited possibilities for

change. China showed different pattern of internationalization process compared to fellow Leninist

Regime countries by establishing a mixed economic system.

The combination of a more marketized economy combined with an authoritarian political structure

has been described as “adaptive authoritarianism,” and “market Leninism”. In 1978, Deng Xiaoping

launched China’s reform program, which led to a profound marketization compare to previous regime

practice in terms of party control over the economy and society. Shirk (1996) argues that

internationalization shapes the coalitional possibilities open to political entrepreneurs. In this vein, the

case of China presents a complex picture of the impact of internationalization on economic policies.

China’s pre-1978 experience confirms findings from other communist countries that Leninist political

                                                                                                                         20  Jeffery A. Freiden and Ronald Rogowski, 1996. “The Impact of the International Economy on National Policies: An Analytical Overview.: In Internationalization and Domestic Politics, edited by Robert O. Keohane and Helen V. Milner, 25-47, Cambridge: Cambridge University Press.

    15  

and economic institutions prevent the influence of internationalization on domestic outcomes. (Shirk,

1996) During this period, Government tried to get full control of the foreign trade and tried to set

prices of the command economy, keeping domestic groups ignorant of international price signals. The

government blocked these groups from such external information so they wouldn’t get effected from

internationalization. As Leninist regime, economic interests were not permitted to influence policy-

making. The groups’ interests were articulated only through the Communist Party and government

ministries and agencies, which had been structured since the mid-1950s to enhance the power of the

holders of capital, which was scarce in China, and thereby to perpetuate policies of rapid

industrialization and autarky.(Shirk, 1996)

A positive impact of internationalization on China’s reform was the process of foreign trade

decentralization. The central government witnessed unprecedented opportunities from liberalization

and what it does to economic growth. Deng Xiaoping and his allies chose a path of gradual

decentralization of trade, instead of pursuing it rapidly to its full liberalization. This choice involved

maintaining the non-convertibility of Chinese currency during the transition and distributing

differential rights to retain foreign exchange earned from exports to provinces. This gradual,

decentralized, particularistic approach to reforming foreign trade administration and encouraging

exports was extraordinarily successful in both political and economic terms. For instance, the

decentralization of foreign trade administration was accompanied by a decentralization of authority to

approve foreign investment projects. Local officials were happy to be allowed to gain access to foreign

technology, equipment, and capital. On a negative note, however, decentralization left China with

intensified competition for foreign business among provinces, resulting in the loss of bargaining

power for China as a whole vis-à-vis foreign corporations (Shirk, 1990).21

Besides Shirk, David Zweig is another scholar who has tried to analyze China’s reaction to

internationalization. He emphasizes the role of both domestic and international structure, which should

be considered together as we cannot rely solely on one or the other to explain China’s

internationalization. Moreover, Zweig agrees with the neoliberalist view on market forces affecting the

process of internationalization and not just the regulatory constraint, and he also emphasizes other key

                                                                                                                         21  Shirk, Susan L. 1996. “Internationalization and China’s Economic Reforms” In INTERNATIONALIZATION AND DOMESTIC POLITICS, edited by Robert O. Keohane, Helen V. Milner, 186-206. Cambridge University Press.  

    16  

actors who played critical roles in the expansion of China’s internationalization. According to him,

four key actors are affected by differences in relative prices, which is the nature of the regulatory

regime controlling transnational exchanges: external political and business stakeholders; China’s

ruling elites; bureaucratic agents; and local communities, organizations, and individuals.

Zweig proposes several components to explain China’s internationalization. First, significant

opportunities were generated by relative prices due to the country’s long period of economic isolation.

The differences between the values of goods and services of China compare to the outside world were

huge. Second, the central government of China opened the door to rest of the world: elite-driven

developmental strategies created the rules according to which local governments, firms, groups, and

individuals made their allocative decisions (Stephan Haggard, 1990). Global factors mixed with

internal ones to create constraints and incentives for those actors who sought global links and pushed

for deeper interdependence. Zweig calls this incorporated interest generated by the regulatory regime,

“channels of global transaction.” Such boundaries and incentives were also independent variables

affecting domestic behavior, and not just at-the-border regulations. While the author emphasizes the

state as the main actor to implement new regulation to control international transaction even as it

liberalized specific sectors, the individuals, local state, local communities, and organizations also

played a critical role in lowering institutional barriers to transnational exchanges. It was the central

government that opened the first door and created the necessary barriers, even deciding which door to

open, but the mentioned domestic actors manipulated those barriers to global transactions.

Furthermore, Zweig analyzes the impact of internationalization by comparing the latter’s different

levels or processes among sectors (urban/rural internationalization, foreign assistance to government

institutions and local communities).

He proposes an empirical definition of internationalization that involves two components: an

expanded number of transnational exchanges, and a decrease in the barriers or regulations limiting

such exchanges. Furthermore, he presents the graph in Figure 2.1 to support his main argument:

movement from left to right on the horizontal axis shows the number of transnational exchanges,

while movement downward on the vertical axis represents barriers or regulations.

    17  

Figure 2.1: Level of regulatory constraints

Quadrant A: Isolated, with low levels of transnational flows and little need for regulation.

Quadrant B: Autarky, with low flows due to high levels of bureaucratic regulation. In 1978, China

decided to move out of this quadrant and engage the world economy more fully.

Quadrant C: Mercantilist, economic nationalist, or developmentalist perspective, in which global

transactions increase markedly but the state strictly controls those flows. Neoliberals would expect

China to move to Quadrant D due to international norms, domestic interest groups, and the need for

economic efficiency.

Quadrant D: Liberal market or interdependent model, in which flows are high and regulation is low.

The general expected move, based on neoliberalist assumptions, is that once a state initiates the

deregulation of global transactions, it will move to Quadrant D; instead, in reality, its enormous elite

and bureaucratic interest has moved China into Quadrant C, Mercantilist. As the level of China’s

internationalization increases, however, the country moves down the vertical axis towards Quadrant D.

China’s membership in international organizations and regimes has led it to adjust its regulations to

the international system. Joining the WTO, the International Monetary Fund (IMF), and the World

Bank has changed China’s foreign trade and investment regime, making it more congruent with

international practice.

    18  

In this paper, I mainly follow Zweig’s view on internationalization in China, but I admit that there is

a demand for a new explanation of China’s new approach to internationalization, represented by the

OBOR initiative. In China, the central government has managed to remain in control of overall

transnational actions, and it is now trying to implement-larger scale economic plans. These include the

OBOR initiative, which involves similar sectors from previous policy implementation but that are

even more internationalized, including OBOR member states as a new sector. Now, not only is China

moving from Quadrant C to Quadrant D (Figure 2.1), further immersing itself in the international

system, but it is also leading the way to create new types of international norms and global capital

regimes, and establishing new organizations on international markets, such as AIIB. Thus, Zweig’s

approach needs to be developed to explain China’s internationalization and its new role in the system,

not as a mere participant, but as an active leader.

In this chapter, I reviewed previous studies on internationalization process and what it means in

domestic politics, focusing on China. On the basis of theoretical background presented here, the

remainder of the paper will examine the current situation of China in terms of internationalization and

discuss why this OBOR initiative is unprecedented case of internationalizing ones domestic

development.

    19  

III.   China and the Development of OBOR and the Asian Infrastructure Investment

Bank

 

In this chapter, I explain why it was necessary for China to implement the Belt and Road strategy and

establish the AIIB. The launch of OBOR was quickly followed by the establishment of the AIIB,

including 57 founding member countries, with China providing half of the bank’s start-up capital:

USD 50 billion. The aim in initiating the AIIB was to make the OBOR strategy effective: the Chinese

government hopes to use this bank to finance the countries along the OBOR routes to expand their

infrastructures and promote their economic growth. Asia will benefit from the AIIB because

preexisting institutions, such as Asian Development Bank (ADB) and World Bank, cannot fulfill the

huge demand for productive economic infrastructure development in Asia. In contrast, the AIIB

specializes in Asia and infrastructure development with innovative voting rights, staff recruitment, and

procurement. But what drove China to take on the role of creating this enormous economic entity that

specializes in funding infrastructure projects? What was the strategy in establishing the AIIB in

relation to the OBOR initiative?

This chapter is divided into four sub-parts: Domestic Economic Needs; International Economic

Needs; Strategy Behind the AIIB; and The OBOR Initiative and its Relationship to the AIIB’s

Projects. I examine China’s domestic components regarding the implementation of OBOR in more

detail in Chapter 5 to explain how the country turned its domestic development into an international

matter. To this end, I introduce the concept of Internationalization of Domestic Development.

However, in the present chapter, I focus on the domestic and international economic needs to

implement OBOR. The remainder of this chapter will hopefully give a reader basic information for the

critical evaluation regarding China’s intention behind implementing the OBOR.

1.   Domestic Economic Needs

China’s economy has grown rapidly over several decades, surpassing Japan in 2010 and becoming the

second largest economy in the world. In recent years, however, this economic growth has slowed due

to the rapid rise in labor costs. Furthermore, because the country’s petrochemical, steel, and other

basic industries are facing market saturation and excess capacity, its economic growth will eventually

suffer. Thus, after witnessing nearly three decades of record high growth, the economy has been

slowing down, and the Chinese economic model, traditionally based on manufacturing, investments,

    20  

and exports, is currently rebalancing towards domestic consumption development. The high

investment, high growth era and the long-term continuance of infrastructure investment have left

China with a world-class scale of distribution companies and construction experience. The country

needs to find another trajectory for its communication, raw materials, electricity, and military strength

industry; and the new Silk Road could be the answer to this problem. This is another important point,

because China needs a new market in which to direct its enterprises and workforce.

Internally, the effects of globalization and liberalization have fueled a renewed interest in regional

development and inequality, because China’s reform process was spatially highly uneven. Rapid

economic growth after the economy was opened up to rest of the world left some areas very rich,

while other regions were omitted from the government’s preferential development plan. After such

inequality reached its peak, the government turned its attention to the fact that regional inequality was

closely intertwined with economic growth, social stability, ethnic relations, and political unity. The

regional developmental gap between coastal and middle/western regions, and between urban and rural

areas, was greater than China ever anticipated through its preferential developmental plan. According

Zhang Yesui in a speech given in March 2014, middle and western China account for 80% of the land

and 60% of the population, but only collect 14% of foreign trade, 17% of FDI, 22% of overseas

investment, and one-third of GDP. For the continuous economic instability in western region, China

believes that accelerated development should work as cure. Scholars examined the negative effect of

regional disparity and ethnic discrimination on economic growth, and the central government of China

began to make efforts to develop the interior of the country, in particular by launching the Great

Western Development Strategy in 1999. When the strategy could proceed no further, China changed

its tactic to find a way to use the western region as a “Eurasian Land Bridge” through Central Asia to

Europe. The March 2015 blueprint for OBOR shows China’s intention of “making good use of

Xinjiang’s geographical advantages,” to “make it a key transportation, trade, logistics, culture, science,

and education center.”

The OBOR initiative and China’s domestic economic and political needs are closely related, and I

consider this later, in the chapter regarding the AIIB’s strategy. Various projects funded by the AIIB

are closely related with China’s domestic issues, especially within the western region. For this reason,

    21  

OBOR and AIIB are judged as a solution not only to boost the economy in the western region, but also

as alternatives to infrastructure businesses, and as ways of improving security issues.

2.   International Economic Needs

 

There is a huge demand for productive economic infrastructure all around the world. In 2011, the

Organization for Economic Co-operation and Development (OECD) estimated that global

infrastructure requirements over the next two decades will cost around USD 50 trillion. Moreover, the

ADB has estimated that developing countries in Asia will need to invest USD 48 trillion from 2010 to

2020. Figure 3 shows the infrastructure deficiencies in countries along the OBOR. U.S. driven World

Bank (WB) or ADB are now changing their path more towards concessional lending and knowledge

sharing with low-income countries, because the investments needed are typically for large-scale, long-

term public goods. There was certainly room for a new development bank specifically working to

finance large-scale economic infrastructure on commercial terms. It was not easy to steer more savings

towards infrastructure, however, either globally or in Asia. Many attempts and movements were made

to fill these gaps in Asia, and reviving the “Silk Road” was one common vision.

Before China announced the OBOR initiative in 2013, many attempts had already been made to revive

the glory of the ancient Silk Road. In 1993, the WTO suggested the idea of promoting the historic Silk

Road through tourism exchange. In 1996, the first Silk Road Travel Forum was held by China, where

member states established a framework for future “joint marketing and promotional strategies,” as

well as for Silk Road countries to establish new business links (UN: silkroad.unwto.org). In 1997,

Japan’s Hashimoto administration suggested “Silk Road diplomacy,” funding “the Silk Road,” which

focused on tourism inventory in Silk Road area sharing information on attractions, facilities, and

information centers. Moreover, Japan tried to expand its economic and political leverage in Central

Asia with development assistance in the infrastructure sector and energy diversification, with the aim

of entering the global market.22 The United States also procured the passage of The New Silk Road

Initiative, meaning to integrate the Central Asian countries of Kyrgyzstan, Kazakhstan, Turkmenistan,

                                                                                                                         22 Akio Kawato, “What is Japan up to in Central Asia?” in Christopher Len et al. eds., Japan’s Silk Road Diplomacy: Paving

the Road Ahead (Singapore: Central Asia-Caucasus Institute, 2008), pp.17-18.

 

    22  

Tajikistan and Uzbekistan with India, Afghanistan, and Pakistan by liberalizing trade and building

infrastructure, including roads, bridges, electrical grids, railways, and pipelines. Furthermore, South

Korea’s Eurasia initiative is also similar to OBOR in that they were targeting the silk road line for

investment and creating a cooperative relationship with countries along the region.

Despite these many efforts, however, none had any notable success. This is unsurprising, since

Central Asia is probably the world’s least economically or politically integrated region. There have

been many conflicts in the region, from terror bombing to border wars. The ADB once reported that its

intra-regional trade consisted of only 6.2% of global trade, and that, more importantly, there was a

lack of trust between governments.

All of this makes what China has achieved seem improbable. However, China understands

transportation bottlenecks are barriers to regional economic integration, and the OBOR initiative is a

realistic solution for regional cooperation. The “Silk Road Economic Belt” mainly focuses on various

infrastructure projects, transportation, energy, and telecommunication. By joining China’s new Belt

and Road initiative, countries are interacting for commerce and not conflict: they are joining forces to

build a network of transportation infrastructure, integrated customs, and cross-border procedures

promoting trade, travel, and investment.

    23  

Table 3.1: List of countries that have participated/shown interest in the Belt and Road initiative

Figure 3.1: Silk Road economic belt

Source: Compiled by the Fung Business Intelligence Centre based on the framework chapter on the vision and actions on jointly building a Silk Road economic belt and a 21st century Maritime Silk Road

    24  

Table III-1: The 57 AIIB Signatories

Arabia India Nepal Sri Lanka Australia Indonesia The Netherlands Sweden Austria Iran New Zealand Switzerland Azerbaijan Israel Norway Tajikistan Bangladesh Italy Oman Thailand Brazil Jordan Pakistan Turkey Brunei Kazakhstan Philippines United Arab

Emirates Cambodia Kuwait Poland United Kingdom China Kyrgyzstan Portugal Uzbekistan Denmark Laos Qatar Vietnam Egypt Luxembourg Russia Finland Malaysia Saudi France Maldives Singapore Georgia Malta South Africa Germany Mongolia South Korea Iceland Myanmar Spain

Source  2  :  The  AIIB's  official  website,  https://www.aiib.org/en/index.html

Many have argued that the AIIB will play a critical role in financing the countries along the OBOR

routes to expand their infrastructure and promote economic growth. Some organizations already exist,

such as the ADB, the World Bank, and the IMF, to fund infrastructure projects in Asia, but they

cannot deliver sufficient funding to those countries along the OBOR routes in need of infrastructure

support. According to the AIIB official website, the bank plans to provide project loans of USD 1.2

billion in 2016, and USD 2.5 billion in 2017.

In most developing countries, the ranking of infrastructure lags far behind. As mentioned above,

most countries along the OBOR routes are in urgent need of strengthening their infrastructure. The

process of economic development in China shows how strong infrastructure plays a crucial role in

promoting economic development, and this explains why most OBOR countries have joined the AIIB:

they understand the importance of infrastructure and seek the construction funds from the AIIB.

China’s move to establish the AIIB and OBOR came from the popular notion that long-term economic

growth, can only be achieved through massive, systematic, and broad-based investments in

infrastructure assets. Xi Jinping insists that the OBOR fund and the AIIB will foster “economic

    25  

connectivity and a new type of industrialization, and promote the common development of all

countries as well as the peoples’ joint enjoyment of development fruits.” 23

                                                                                                                         23  from his speech at the One Belt One Road International Think Tank Forum, 2016, “A New Silk Way Belt- is a driver of new economic development and financial growth”, Beijing Capital Hotel, Jinyun Hall.

    26  

Table 3.3: The AIIB's projects

Approved Projects Proposed Projects

1. Azerbaijan: Trans-Anatolian Natural Gas Pipeline Project (co-financed with the World Bank)

1. Kazakhstan: 40 MW Gulshat PV Solar Power Plant Project (co-financed with the European Bank for Reconstruction and Development, EBRD)

2. Oman: Duqm Port Commercial Terminal and Operational Zone Development Project

2. Bangladesh: Natural Gas Infrastructure and Efficiency Improvement Project (co-financed with the ADB)

3. Oman: Railway System Preparation Project 3. India: Andhra Pradesh 24x7 – Power for All Project (co-financed with the World Bank)

4. Myanmar: Myingyan Power Plant Project (co-financed with the International Finance Corporation, the ADB, and certain commercial lenders)

4. Indonesia: Dam Operation, Rehabilitation, and Safety Improvement Project (co-financed with the World Bank)

5. Pakistan: Tarbela 5 Hydropower Extension Project (co-financed with the World Bank)

5. Indonesia: Regional Infrastructure Development Fund Project (co-financed with the World Bank)

6. Bangladesh: Distribution System Upgrade and Expansion Project

6. Kazakhstan: Center South Road Corridor Project (co-financed with the World Bank)

7. Pakistan: National Motorway M-4 (Shorkot-Khanewal Section) Project (co-financed with the ADB)

7. India: Transmission System Strengthening Project (Tamil Nadu)

8. Tajikistan: Dushanbe-Uzbekistan Border Road Improvement Project (co-financed with the EBRD)

9. Indonesia: National Slum Upgrading Project (co-financed with the World Bank)

Source: The AIIB’s official website, https://www.aiib.org/en/index.html

    27  

Figure 3.2: OBOR infrastructure projects have started to kick off; infrastructure projects in OBOR initiative as of April 2017

Type of Infrastructure Project Start Time Railways Israel Red Line light rail project in Tel Aviv May 2015

China-Laos railway Dec 2015 China-Kyrgyzstan-Uzbekistan railway Restarted in January 2016 High-speed railway in Iran Feb 2016

Highways Highway in Pakistan (China-Pakistan Economic Corridor) May 2016

Ports Port city project in Sri Lanka Restarted in March 2016 Waterways International waterway project in Vietnam Apr 2016 Nuclear power plants Nuclear power plant in Pakistan Mar 2016 Hydropower station Hydropower station in Pakistan Jan 2016 Electric power plants Electric power plant in Mongolia May 2016 Airports International airport in the Maldives Apr 2016

International airport in Nepal Apr 2016 Source: OBOR official website, media reports

    28  

IV.   Internationalization of Domestic Development

 

In this chapter, I examine China’s pattern of domestic development with the aim of determining how

OBOR was implemented to serve as an external instrument to assist in the necessary domestic

rebalancing process, furthering the country’s internationalization. The theoretical framework that

explains why and how China decided to internationalize, decentralize, and deregulate in gradual stages

was reviewed in Chapter 2. To summarize, the neoliberal model would predict that the potential

beneficiaries of internationalization, aware of their comparative advantage in foreign trade and

attracting foreign investment, would collectively lobby the central government to lower barriers. The

regulatory control model would predict that changes in relative prices would have little impact on

local actors who, due to strong state controls, did not know their existence. Political and administrative

interest, rather than market forces, would direct domestic and international capital flow. The reality is

not so clear cut, however, especially for China. The country’s leaders gave preferential policies to

specific localities, removing regulatory constraints. Such policy reform resulted in serious spatial

deregulation, which I discuss in greater depth later in this chapter.

During my research, I posed the question, “what makes China’s internationalization process and the

case of OBOR unique compared to others?” Internationalization of one state and the linking of such a

process with that state’s domestic policy might not be a topic that challenges today’s academic world.

It has even become more normal, as globalization and liberalization have penetrated deeply into global

society. However, the impact of China’s internationalization on the rest of the world and the fact that

the country’s economic development has been unique throughout its history gave me the academic

motivation to further pursue my research. At the same time, the OBOR initiative is the first

multilateral cooperation project to be established solely by Chinese government, which shows

significant progress since China first opened up. Starting with the simple opening-up to the global

market to extend its level of economic development, and leading up to its first initiative to pursue

sustainable development along with developing countries, China has clearly gone through a unique

and significant process. In this chapter, I focus on the specific policies and barriers set by the

government during China’s economic and systemic transition leading up to the OBOR initiative. I aim

to systemize China’s internationalization process by looking at historical evidence, such as its gradual

change in economic policy reform and how it phased in the internationalization stage by stage. The

historical facts illustrate China’s “segmented deregulation” and domestic politics of urban and rural

    29  

internationalization, eventually creating a new international regime and leading the way to deeper

integration with the OBOR member states. In this vein, China’s internationalization can be divided

into three stages: stage 1 was its first opening-up to the global market in 1978, which resulted in

regional inequalities and led the central government to implement stage 2, the Great Western

Development strategy, which was in turn soon followed by stage 3, the OBOR initiative.

Ever since China announced its first ambitious plan regarding OBOR, there have been heated

debates about its intentions. China is suffering from an excess capacity problem which, it seems, can

only be resolved through external capacity building. Domestic reform, however, seems to be a much

more promising option. There is no doubt that China stabilizing its domestic situation will be an

important factor affecting the implementation of OBOR. At the same time, China has been struggling

to face the consequences of regional inequality in the countryside, and a policy intervention was

implemented in what is known as its “Go West” strategy. The central government understands that

widening the coastal-interior gap is a serious threat to China’s economic prosperity, stability, and

unity, and has launched the Great Western Development strategy. Following its spatial inequalities,

and with the development of poorer interior regions not having been improved as much as China

hoped, it is probably time to look outward. OBOR initiative seems to be the solution to such internal

struggle. In this vein, China’s new Five-Year Plan (FYP) and OBOR initiative together could work as

a “new engine” to help push forward domestic reform and reverse the slowdown of Chinese economic

development. The initiative claims to follow a win-win strategy for related countries pursuing

sustainable growth. And while it is true that OBOR will be beneficial for the development of involved

countries, at the same time, we should not overlook the fact that OBOR is very China-centric both

geographically and strategically. Section 4.2, Stages of Internationalizing Domestic Development,

discusses this matter by analyzing countries that are involved in OBOR projects and the geographical

implementation of the Belt and Road.

One major difference with OBOR is that China is no longer a developing state reliant on foreign aid;

instead, it is now a donor state, leading the way in internationalization. The scale of Official

Development Asistance (ODA) since 1979 has been enormous, making China one of the world’s

largest recipients of foreign aid. Furthermore, as of 2000, China was the largest beneficiary of the

    30  

United Nations Development Programs (UNDP) and World Bank aid. As of December 2000, the ADB

had committed to loans totaling $410.3 billion.

Table IV-1: ODA

Program Year Funding CP1 1981-85 79.6 CP2 1986-90 147.8 CP3 1991-95 171.6 Country Cooperation Framework1 1996-2000 95.2 Total 494.2

source: UNDP Country Office in China, 1998

Note: Includes counterpart funding from Chinese side, which in 1996-2000 was valued at over USD

37 million. CP = Country Project; UNDP = United Nations Development Program. Units: USD

million.

1.   Studies on the Convergence Level and Disparity of Regional Growth in China

 

The question of what caused interregional disparities in growth in China has been an important

concern for the country. Some argue that regional investment levels and production technology are the

primary causes, while others suggest regional industrial structure and its resources as possible reasons

(Xinzhong Lee and Seung Rok Park, 2003). Sylvie Demurger (2001) examines the impact of

geographical location and preferential policies on China’s economic growth. She concludes that, due

to the traditional residential system and national control of the bank system, by limiting the flow of

labor resources as well as capital, the loan policies of SOEs and the regional trade barriers generated

by local protectionism are critical causes of interregional disparity in China. Thus, she suggests that

the development strategy for western regions must continue to include physical, human, and

institutional capital. In another study, Jia Hui and Komei Sasaki (1997) aim to identify the causes of

the aforementioned regional disparities and demonstrate that the regional investment level is the most

important factor, and not regional production technology. They suggest that different regional

investment strategies could decrease interregional disparities to a great extent. Furthermore, in a more

recent study, Jian Wu (2002) examines the determinants of differences in regional growth among

China’s provinces by using a “multi-dimensional variance model.” Using this model, he argues that

the regional distribution of FDI inflows in China cannot explain the disparities in interregional growth,

    31  

and that instead, regional differences in domestic investment, in particular the significant differences

in the efficiency of investment, are a major reason for these disparities.

China made significant investments as part of its “Go West” strategy, and as a result there has been

significant increase in GDP growth in many of targeted provinces. Nevertheless, it still has a long way

to go to achieve parity with the rest of the Chinese provinces. The Western Development strategy is

considered unsuccessful by many scholars. In any case, it was not enough to guide the region to self-

sustainable growth. Hence, China is looking for a new way to resolve this issue. It also needs to find

new markets to absorb the products of its excess industrial capacity, and to improve access to energy

supplies as domestic demand continues to grow. Therefore, China needs to look for ways of economic

and political integration with its neighboring countries. In this vein, China is exploring the application

of a new concept of “International Capacity Cooperation” by relocating some of its manufacturing

capacity to OBOR countries. To this end, China signed a memorandum with 17 OBOR countries for

capacity cooperation in 2015. By establishing a passage to a “Eurasian Land Bridge” going from

China all the way to Europe, China wishes to reduce some of its internal insecurities of economic

slowdown.

OBOR is a product of China’s long-term economic developmental roadmap, which developed

slowly during the process of the opening-up policy, the Great West Development strategy, the

establishment of the AIIB, and the internationalization of the RMB. The regional disparity that

occurred as a result of this opening-up policy and the country’s aggressive and selective investment,

the deepening concern for the western region, continuing terrorist threats from external forces near this

region, and political-social discontent are all connected to OBOR. The establishment of the AIIB and

the internationalization of the RMB were announced and implemented relatively simultaneously to

assist in China’s grand plan.

    32  

2.   Stages of Internationalizing the Domestic Development

 

2.1 Stage 1: China’s Opening-up Policy

 

Deng Xiaoping introduced a new platform at the Third Plenum of the Eleventh Central Committee in

December 1978. This platform consisted of 1) decentralization and gradual marketization of the

domestic economy; and 2) foreign economic policies that welcomed foreign investment and promoted

exports of light industrial manufactured goods. This approach received support from the natural

beneficiaries of the open policy, namely light industry and agriculture, coastal provinces, provincial

officials, and industrial bureaucrats. The market-oriented reform period in China also began in 1978,

particularly with the Guangdong area expanding to increase its export capacity. The Chinese

government decided to implement the opening-up policy and begin economic restructuring. It started

the process by reducing the barriers between its cities and the global economy, starting with four

special economic zones (SEZs) along its southern coast area: Shenzhen, Zhuhai, Xiamen, and

Shantou. Soon after, the central government announced 14 Coastal Open Cities (COCs), and

additional selected regions of the Yangzi Delta, Pearl River Delta, and Minan Triangle in 1988

(Teather, 1999). Further extension of this policy followed Deng Xiaoping’s southern inspection trip

(nanxun) in 1992: five new Technological Zones were established in 1993, with two more in 1994.

Naturally, the east coast became the foreign investors’ favored location due to the policy and its

favorable investment environment and convenient position. The reform was planned in order to rectify

the line and block compartmentalization and trying to establish more rational spatial division of labor

based upon the market movement. It is ironic that such “zone fever” were directly linked to China’s

regional disparity.

Initially, the open door policy attracted foreign investment and promoted foreign trade.24 Since the

provinces and the individual enterprises now had the investment making decisions power due to

decentralization, greater reliance is now placed on the market. Capital-intensive basic industries

focusing on iron, steel and petrochemicals required a concentration of resources to selected urban

centers which gave room for development. This type of spatial allocation has constantly appeared as

another important ingredient of socialism, especially of the Leninist type. However, such spatial

                                                                                                                         24 Démurger, Sylvie. Et.al. “Geography, Economic Policy, and Regional Development in China”, CID Working Paper No. 77, Octorber, 2001.

    33  

reallocation of development strategy that favors urban areas comes at the expense of the rural area that

are also already abundant with resources in terms of industrial and human capital (Li Si Ming, 1999).

The table below presents the schedule of preferential policies executed since China’s open door

policy was implemented.

Table IV-2: Schedule of the preferential policies executed in China’s provinces and cities

Schedule Style and Numbers of Opening Areas Geographical Location 1979 SEZs: 3 Guangdong 1980 SEZs: 1 Fujian

1984

COCs: 14

Liaong, Hebie, Tianjin, Fujian, Jiangsu, Shanghai, Zhejiang, Shandong, Guangdong, and Guangxi

Economic Technology Developing Zones (ETDZs): 10

Liaoning, Hebei, Tianjin, Jiangsu, Zhejiang, Shandong, and Guangdong

1986 ETDZs: 2 Shanghai

1988 Opening Coastal Strip Zones (OCSZs): SEZs: 1, and ETDZs: 1 Hainan and Shanghai

1990 The Pudong New Zones in Shanghai (PDNZs): 1 Shanghai

1992

The Main Coastal Harbor Cities Opening Zones (MCHCOZs): 13

Tianjin, Guandong, Shandong, Jiansu, Zhejiang, Fujian, and Hainan

The Opening Cities around the Yangtze River (OCYRs): 10

Jiansu, Anhui, Jiangxi, Hunan, Hubei, and Sichuan

The Border Economic Cooperation Zones (BECZs): 13

The Inland Provinces and Autonomous Capital Cities (IPACCs): ETDZs 5

1993 ETDZs: 12 Anhui, Guangdong, Heilongjiang, Hubei, Liaoning, Sichuan, Fujian, Jilin, and Zhejiang

    34  

1994 ETDZs: 2 Beijing and Xingjiang

Source: Based on the China Foreign Investment Report Series by Chinese Academy of Social Sciences, as well as Wing

Thye Woo (2002)

The central government launched the Coastal Development Strategy, aiming for regional division of

labor in which the coastal area would concentrate on developing labor-intensive processing industries

targeting the international market. Meanwhile, the inner provinces worked more as a supporting role

for the development of resource-based industries. (Teather, 1999). Shirk (1996) introduces the

following core components of Deng’s open policy, introduced in a series of policy initiative moves in

the decade following 1978.

-The expansion of exports, particularly of light industrial manufactured goods, by decentralizing and

making more incentive-compatible foreign trade administrations. The monopoly of the central foreign

trade ministry (called MOFTEC, or the Ministry of Foreign Trade and Economic Cooperation, in its

current incarnation) was destroyed, and the trading authority was dispersed among various ministries

and provinces, which were allowed to retain a proportion of their foreign exchange earnings.

Collective township and village enterprises located in the countryside were encouraged to export.

- The acquisitions of foreign technology, investment, and managerial and international marketing

knowledge through joint ventures. To attract foreign investment, approval authority was decentralized

to ministry and provincial officials.

-The creation of SEZs in the coastal provinces of Guangdong and Fujian, which were authorized to

offer concessionary terms to foreign investors.

FDIs After Opening-Up

Following the economic reform and opening-up policies, China became an attractive location for

Foreign Direct Investment (FDI). In the beginning stage, Chinese reformers doubts about the change

and hesitant about opening up to FDI, putting restriction on it. SEZs were created for the Multinational

enterprises to invest, and this particularistic treatment of enterprises and specific regions such as SEZs

can be characterize the 1980s. On surface, foreign-funded enterprise and the local firms had the same

legal status to sell their products in domestic market. However, the foreign capital flow into regions

    35  

with positive outlook, which indicated that the more developed regions on the eastern coast offered the

best prospects.25

Despite the ninth FYP (1986-1990) calling for accelerated development in the interior provinces, it

was put forth to channel FDI and foreign investments to the central and western regions, but the plan

did not produce any significant impact. During 1992-1995, the eastern coastal region recorded to take

up almost as much as 90% of total FDIs. The eastern coastal region such as Jiangsu, Guangdong,

Fujian, Shangdong, Shanghai, Geijing and Tianjin are all included in the area. In contrast, the western

region generally has a high concentration of minority populations accounted for low FDI percentage,

less than 10%. The table below presents the shares of FDI inflows in GDP among provinces during the

1990s.

Table IV-3: Shares (in percentage) of FDI inflows in GDP

Provinces 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991

Beijing 5.623 7.521 8.924 7.295 7.991 6.466 10.905 4.45 2.721 2.177

Tianjin 5.888 10.072 13.094 16.853 16.236 13.804 12.064 6.596 1.445 2.059

Hebei 1.105 1.888 2.779 2.313 1.999 1.602 2.062 1.351 0.488 0.281

Shanxi 1.132 2.15 1.362 1.506 0.878 0.488 0.32 0.707 0.521 0.043

Inner Mongolia 0.624 0.421 0.631 0.552 0.607 0.58 0.506 0.922 0.068 0.025

Liaoning 3.625 2.107 4.672 5.476 4.576 4.259 5.042 3.665 1.934 1.607

Jilin 1.532 1.501 2.175 2.305 2.808 3.017 2.226 2.209 0.745 0.363

Heilongjiang 0.766 0.91 1.557 2.249 1.962 2.143 1.851 1.113 0.461 0.135

Shanghai 5.748 5.821 8.084 10.424 11.29 9.809 10.809 12.046 2.443 0.865

Jiangsu 6.198 6.537 7.626 6.745 7.215 8.408 7.994 5.465 3.778 0.729

Zhejiang 2.212 1.902 2.188 2.687 3.049 2.891 3.717 3.113 0.969 0.454

Anhui 0.868 0.744 0.817 1.349 1.801 2.011 2.142 1.388 0.376 0.086

Fujinan 7.248 9.385 10.611 11.596 13.143 15.63 18.989 14.612 9.967 4.032

Jiangxi 0.939 1.433 2.079 2.325 1.651 2.002 2.379 1.659 0.961 0.216

Shandong 2.879 2.441 2.546 3.46 3.674 4.489 5.681 3.885 2.519 0.636

Henan 0.909 0.943 1.172 1.406 1.189 1.331 1.498 1.057 0.229 0.193

Hubei 1.827 1.963 2.175 2.039 1.906 2.183 2.761 2.187 1.029 0.272

Hunan 1.521 1.627 2.172 2.54 2.341 1.931 1.684 1.972 0.734 0.162

Guangdong 9.665 11.403 12.566 14.318 14.991 15.92 19.234 13.498 8.899 5.808

Guangxi 2.119 2.692 3.855 4.041 3.247 3.751 5.804 5.704 1.552 0.327                                                                                                                          25  Alex Grannenman, Meine Peieter van Dijk, 2015, “Foreign Direct Investment in China, Factors Determining a Preference for Investing in Eastern or Western Provinces”, http://file.scirp.org/pdf/ME_2015082715270527.pdf  

    36  

Hainan 6.878 0.513 13.527 14.27 16.842 24.354 23.909 15.787 13.735 7.805

Chongqin 1.273 1.337 2.497 2.567 n/a n/a n/a n/a n/a n/a

Sichuan 0.902 0.761 0.861 0.62 1.228 1.28 2.86 1.57 0.381 0.311

Guizhou 0.208 0.371 0.446 0.52 0.366 0.756 1.052 0.595 0.321 0.253

Yunnan 0.542 0.686 0.672 0.835 0.364 0.676 0.575 0.717 0.256 0.036

Xizhang n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a

Shaanxi 1.438 1.347 1.798 4.006 2.307 2.706 2.52 2.011 0.465 0.362

Gansu 0.525 0.365 0.368 0.44 1.048 0.965 1.675 0.185 0.006 0.094

Qinghai n/a 0.159 n/a 0.101 0.045 0.083 0.15 0.17 0.043 n/a

Ningxia 0.543 1.76 0.676 0.264 0.238 0.192 0.468 0.66 0.023 0.013

Xingjiang 0.116 0.17 0.161 0.195 0.582 0.556 0.618 0.604 n/a 0.003 Source: China Statistic Yearbook 1993-2001 by National Statistic Bureau

Ten years later, in 2002, the numbers had changed only slightly, with most FDI, approximately 88%,

continuing to go to the coastal areas. However, the 11th(2006-1010) and 12th (2011-2015) FYPs

promoted investment in western China, and a more equal distribution of FDI is hence expected.

Reform with Chinese Characteristics

Bureaucrats in planned socialist economies such as China have formidable powers, and tend to resist

deregulation. However, economic interest should not influence policy-making. Until 1978, China

insisted on maintaining rather isolated, autarkic relationship with the international system. This can be

characterized by low levels of trade, scientific exchange, foreign investment, tourism, and shipping

(Zweig). Shirk(1996) explains how economic reform in China’s closed economy came about, despite

being controlled by a communist institution, as follows. Compared with Russia, the Chinese version of

communism was more flexible because political and economic authority was more decentralized and

less institutionalized than in the Soviet Union. This allowed for more room in which to break down

reforms into particularistic benefits for Chinese officials, and thereby give them new vested interests

in the reform. Moreover, following the 1978 opening-up, the bureaucrats and domestic actors

recognized significant advantages generated by relative price and the global market. Once the walls

were broken down, international economic force evoked positive domestic responses regarding

China’s reform drive.

Shirk calls this Chinese-style economic reform “gradualism,” “administrative decentralization,” and

“particularistic contracting,” which were the means by which reformist politicians took advantage of

    37  

the positive responses to economic opening-up. This confirms the powerful influence of

internationalization that affected the local group. In addition, we cannot underestimate the fact the

Deng utilized this geographic particularism to earn political credit from the provincial authorities who

received special privileges soon after he was appointed. Soon, other inland regions and coastal regions

saw the effect of such privilege from the special zones and demanded similar privileges for

themselves, or tried to gain some benefit from the open zones. This Chinese approach to reform in

foreign trade administration and the encouragement of exports garnered significant success in both

political and economic terms, receiving bureaucratic (especially local) support for the open policy by

creating a system of selective access to foreign exchange and imports.

Negative Impact of the Open Policy: Regional Disparity

The widening coastal-interior gap and struggling poorer regions have prompted China to consider

regional inequality as the main reason of its regional issues and many other crucial issues for

government policy26. For example, in 1995, the per capita GDP in China’s provincial-level

administration units showed that the level of economic development varied a great deal across the

provinces. Shanghai, being ranked at the top of the list, had a per capita GDP of RMB 17,403, which

was nearly 10 times that of Guizhou (RMB 1,796) province, with the lowest per capita GDP.27

Provinces at the top of the list, including Zhejiang, Guangdong, and Jiangsu, had per capita GDPs in

excess of RMB 7,000, which was two to three times those of the poorest provinces, such as Guizhou,

Gansu, Tibet, and Shaanxi. The provinces with high per capita GDP were generally in the south and

the eastern coast, whereas provinces with low per capita GDP were generally in the central and

western parts of the country. 28 As mentioned above, many have blamed these regional disparities and

differences to Deng Xiaoping’s open policy launched in 1978.

                                                                                                                         26 Yehua Dennis Wei, 2010. “Multiscal and Multimechanism of Regional Inequality in China:Implications for regional policy”, Journal of Contemporary China, Volume 11, 2002-Issue 30, 109-124. 27 Peter T.Y. Cheung. 1998, Provincial Strategies of Economic Reform in Post-Mao China: Leadership, Politics, and Implementation, M.E. Sharpe, New York 28 Ming L.S. 1999, China’s Regional Development Issues. In: Teather D.C.B., Yee H.S., Campling J. (eds) China in Transition. Palgrave Macmillan, London

    38  

2.2 Stage 2: Great Western Development Strategy: Economic Zones – Resolving Internal

Issues

Since the economic reform, China has gradually opened its borders to the international market,

prompting its economic growth. At the same time, however, China has become increasingly unequal

in its regional economic growth. Most of the foreign investment has been in the SEZs, resulting in the

eastern provinces having the highest growth rates in the country.

Further analysis of provincial growth rates of per capita GDP can provide more evidence of uneven

regional development in China. In 1978, the centrally administrated municipalities and some of the

industrial provinces had the highest per capita GDP, followed by selected coastal and interior

provinces, while provinces in the southwest were the poorest.29 Since 1990, however, the coastal

provinces have continued to grow more quickly, while interior provinces lagging behind. By 2002, the

provinces with the highest per capita GDP were all coastal, while the poorest provinces were in the

interior region. The western region, encompassing 72% of the total land area of China, only produced

13.5% of the national GDP. The inequality in the eastern, middle, and western regions consequently

affected interregional growth disparities in the provinces. The FDI inflows were found to have not

only a significant effect on the disparities interregional growth, but also to influence the speed of

convergence of provincial growth rates.30

It has been the biggest concern for China to reduce the regional disparity, as this problem accounts for

nearly 40% of the overall development gap. Moreover, according to an official document, per capita

incomes in this region are only 60% of the national average, with only one-third of the national GDP.

This affects growth, social equity, and political stability. This uneven growth pattern has become a

challenge for China in this era of globalization. In March 1999, a developmental strategy for the

western region was proposed by General Secretary Jiang Zemin at the Ninth National People’s

Congress. Moreover, in January 2000, China launched its 10th Five-Year Plan (2001-2005), “the

Western Development Strategy (Xibu Da Kaifa)”, in the hope of accelerating economic growth and

development of the western inland region. In addition, in January 2000, Zhu made a leadership group

for Western China Development (OECD, China in the Global Economy 2002: 13).

                                                                                                                         29Yehua Dennis Wei and Chuanglin Fang, June 2006, Geographical and Structural Constraints of Regional Development in

Western China: A Study of Gansu Province, Issues & Studies 42, no.2 (June 2006):131-170.

30 Xinzhong Lee and Seung Rok Park, 2003, “Regional Disparities in China’s Economic Growth and Foreign Direct Investment”, Korea Economic Research Institute, 2003-13.

    39  

Western Region Development Strategy (Xibu Da Kaifa) in 2000

China can be divided into six major regional groups: municipalities (Beijing, Tianjin, and Shanghai);

the coast (Hebei, Jiangsu, Zhejiang, Fujian, Shandong, Guangdong, and Hainan); the North-East

(Heilongjiang, Jilin, and Liaoning); the Center (Shanxi, Anhui, Jiangxi, Henan, Hubei, and Hunan);

the North-West (Inner Mongolia, Shaanxi, Gansu, Qinghai, Ningxia, Xinjiang, and Tibet); and the

South-West (Sichuan, Chongqing, Guichou, Yunnan, and Guangxi). The last two groups are

considered western provinces in the Western Development strategy.

Table IV-4: Distribution of FDI inflows in the Eastern, Middle, and Western Regions in China (Unit: USD 10,000)

Year Total FDI Inflows

Total FDI Inflows in Eastern Region

Total FDI Inflows in Middle Region

Total FDI Inflows in Western Region

2001 4,636,700 4,072,777 420,823 143,100 2000 4,033,289 3,541,115 370,002 122,172 1999 3,993,482 3,504,974 374,741 113,767 1998 4,528,389 3,949,012 442,022 137,355 1997 4,637,439 3,993,650 485,248 158,541 1996 4,187,971 3,686,858 398,592 102,421 1995 3,721,549 3,264,139 342,936 114,474 1994 3,326,765 2,922,005 261,269 143,491 1993 2,734,174 2,388,799 242,799 102,576 1992 1,100,402 1,004,650 74,993 20,759 1991 442,583 409,221 19,817 13,545 1990 316,841 297,410 12,260 7,17131

Source:  National  Statistic  Bureau,  National  Planning  Committee  and  National  Information  Center(www.cei.gov.cn)  of  China,  and  Xinzhong  Lee  and  Seung  Rok  Park  (2003)  

 

 

 

 

 

 

                                                                                                                           

 

    40  

 

 

Figure  4-­‐1:  Distribution  of  FDI  Inflows  in  Eastern,  Middle,  and  Western  Regions  in  China.  Source:  National  Bureau  of  Statistics.  

Table IV-5: Growth Rates of Selected Provinces in China, 1978-2002

GDP Per Capita Average Annual Growth Rate (%)

Average Annual Growth Rate (%)

(RMB)* 1978 1990 2002 19878-90 (1990-2002)

China 368 898 3,170 7.7 11.1 Eastern (Coastal) Region 466 1,199 4,792 8.2 12.2 Jiangsu 430 1,300 5,574 9.7 12.9 Shanghai 2,498 5,052 19,056 6.0 11.7 Zhejiang 331 1,105 5,287 10.6 13.9 Central Region 313 719 2,207 7.2 9.8 Heilongjian 564 1,092 2,767 5.7 8.1 Neimenggu 317 822 2,350 8.3 9.1 Shanxi 363 784 2,125 6.6 8.7 Hubei 330 820 2,757 7.9 10.6 Western region 266 633 1,722 7.5 8.7

0500000100000015000002000000250000030000003500000400000045000005000000

2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990

Distribution  of  FDI  Inflows  in  Eastern,  Middle  and  Western  Regions  in  China  

Total  FDI  inflows Total  FDI  Inflows  in  EasternRegion

Total  FDI  Inflows  In  Middle  Region Total  FDI  Inflows  in  Western  Region

    41  

Sichuan 262 617 1,830 7.4 9.5 Guizhou 175 419 1,032 7.5 7.8 Yunnan 226 582 1,452 8.0 8.1 Xizang 375 725 2,170 5.6 9.6 Shaanxi 291 711 1,921 7.7 8.6 Gansu 348 757 1,960 6.7 8.3 Qinghai 428 737 1,815 4.6 7.8 Ningxia 370 843 1,902 7.1 7.0 Xinjiang 313 880 2,213 9.0 8.0

Source:  National  Bureau  of  Statistics.  A  compilation  of  statistical  materials  from  50  years  of  China,  1990;  and  National  Bureau  of  Statistics,  Statistical  Yearbook  of  China,  2003.  Note:  in  real  prices.  

In November 1999, Premier Zhu Rongji and Vice-Premier Wen Jiabao initiated the newly formed

“State Council Leading Group for Western Region Development.” In 2001, the official website of the

Western Development programs were launched, with the construction of the “West-East Gas Pipeline”

beginning in 2002. The Vice Premier Wen discussed regarding the uneven development among

regions, stressing the importance of the Western Development strategy and East-West interaction, at

the 10th National People’s Congress in March 2003.

In February 2012, China’s State Council announced that its approval of its 12th FYP for “Further

Promoting the Economy of the Western Regions.” The plan specifically targets 12 provinces: Tibet,

Inner Mongolia, Ningxia, Gansu, Qinghai, Sichuan, Chongqing, Shaanxi, Yunnan, Huizhou, Guangxi,

and Xinjiang. The central government also appointed those provinces as economic zones.

The following lists the 12 featured economic zones.

Chengdu-Chongqing Economic Zone Guanzhong-Tianshui Economic Zone Beihai Gulf Economic Zone Hohhot-Baotou-Yinchuan-Yulin Economic Zone North Tianshan Economic Zone Central Yunnan Economic Zone Central Guizhou Economic Zone Economic Zone Along the Yellow River in Ningxia Central and Southern Tibet Economic Zone Shananxi- Gansu-Ningxia Economic Zone

    42  

The Great Western Development Strategy aimed at providing preferential policies for the western

region of China such as taxation rates, land use rights, and favorable bank loans, as well as facilitating

huge fiscal transfers to western China. The strategy also includes improving the transportation and

other infrastructure in western region.

The major goals for the plan set by the central government are to increase economic growth, expand

infrastructure construction, improve the ecological environment, provide better public services,

develop and strengthen local industries, raise people’s living standards and reform and open up the

region. Although the western region has suffered, it has great potential to show economic growth as it

has enormous reserves of mineral and energy resources with plenty of sunlight throughout the year.

With the Chengdu-Chongqing Economic Zone as a start, this “Go West” project is expected to show

prominent results, boosting China’s economic growth and becoming a key economic center of western

China.

2.3 Stage 3: Implementation of OBOR – Overcoming the Limitations of the Great

Western Development Strategy

 

The central government set the goals for the Great Western Development strategy to promote the

economic growth and the development of the western and central regions, ultimately to reduce the

spatial inequality in development, and to ensure border security and social stability. By 2014, the

central government had invested more than 700 billion Yuan in internal development, but despite

these efforts, the inequality has not improved. The Great Western Development strategy initially

appeared to be effective reducing development gap between the western, eastern, and central regions.

For instance, the share of the western region in China’s total GDP increased to 18.7% in 2010, from

17.1% in 2000.32 However, it still has a long way to go until the Western region becomes engine for

China’s economic growth and sustainable national development. Therefore, OBOR has also laid down

plans to assist the less developed regions of China – particularly those in northwest, northeast,

southeast, and middle China – to fully utilize the opportunities related to the initiative, thereby clearly

aiming to help reduce the gap between these and coastal areas. Looking closely at this FYP, along

                                                                                                                         32 Yu Hong, 2012, “China’s Western Development Strategy: Ten Years On”, EAI Background Brief No. 715., http://www.eai.nus.edu.sg/publications/files/BB715.pdf

    43  

with the OBOR initiative, it is astonishing to find overlapping components. China is aware that

infrastructure development is the key to the success of the western region. The new Silk Road

international transport corridors will lead from Asia all the way to Europe, opening the gateway to

China and boosting the economic growth of the western inland region.

There is much evidence of domestic policies being directly related to improving the western region,

which is in the area of the new Silk Road. Such evidence shows that China’s OBOR and its efforts to

resolve its internal issues are closely intertwined and related. In the following, I aim to examine this

evidence with regard to China’s Western Region Development strategy and find its connection to the

implementation of OBOR.

As a first example, ethnic unrest in Xinjian is connected to the divide of this area between the north,

where state farms, most of the Han population, and almost all the industrial capacity are located; and

the south, which remains overwhelmingly rural and settled by ethnic minorities. There are certainly

existing concerns with regard to declining state capacity, weak economic institutions, regional

problems, inequality, and potential disintegration (Wei, Fang, 2006). Moreover, besides the economic

setback in the region, the growing risk from terrorism and regional instability is another concern for

China to overcome. However, the government argues that implementation of the OBOR initiative can

help to promote international counter-terrorism cooperation, naturally affecting its western region in a

positive way. It seems that China hopes to resolve the terrorism issue in its western area with the help

of the OBOR initiative and its neighboring countries, arguing that they will all benefit from each

other. In fact, many countries included in the Belt and Road initiative are currently undergoing social

and political transitions, resulting in social instability. The government report encourages cooperation

between China and member countries on appropriate counter-terrorism efforts, which can

simultaneously facilitate the implementation of the Belt and Road initiative.

Finding the connection between FYP and OBOR

The 12th FYP and the visions and actions of Belt and Road, both announced by the central

government of China, have overlapping components. For instance, the Vision and Action Plan of the

Belt and Road specifically states that the initiative will fully leverage the comparative advantage of its

various regions, adopt a proactive strategy of further opening-up, and comprehensively improve the

    44  

openness of the Chinese economy. As for the northwestern and northeastern regions, this plan states

that they plan to utilize Xinjiang’s geographic advantage and its role as a window of westward

opening-up, and make it a key transportation, trade, and logistics center, and a core area on the Silk

Road Economic Belt. Moreover, the document also mentions other areas, such as Shaanxi and Gansu

provinces, to provide full support to the economic strengths; to build Xi’an into a new focus of reform

and opening-up in China’s interior; and to accelerate the development and opening-up of cities such as

Lanzhou and Xining. The plan also proposes to advance the building of the Ningxia Inland Opening-

up Pilot Economic Zone to create a strategic channel as a key basis for industrial and cultural

exchanges with Asian countries.33 Furthermore, it proposes to provide full advantages to Inner

Mongolia, hoping to improve the railway links there. Mongolia, Nigxia, Xinning, Lanzhou, Shaanxi,

Gansu, and Xinjiang are all part of the targeted 12 provinces, or the 12 featured economic zones, from

China’s 12th FYP. For example, the 12th FYP and OBOR both make statements committing to

deepening the economic cooperation between Hong Kong and Macau, and the implementation of

cooperation framework agreements between Guangdong and Hong Kong, Macau area. Such

connection shows how China is trying to align its domestic development strategy with enforceable

international policy.

Geopolitical Dimension of OBOR

The geopolitical dimension of OBOR, with China in the economic-political orbit of many Asian and

European powers, gives China political prerogative over the rest of the world. China’s regional

characteristic is close to Central Asia, the starting point leading to Europe, thereby facilitating

development. OBOR helps to develop China’s western cities, but also serves to enhance its external

network. Geography has an immediate effect on the OBOR initiative: the western region development

and opening-up of the region are necessary to reduce the regional disparity, and to expand the

country’s external network. As part of the OBOR project, China has been aggressively investing in

infrastructure in the six economic corridors in the Belt and Road. The new Silk Road spans countries

in Central Asia, Europe, and all the way to Africa, and its impact on the various economies is

promising. Even with modern technology reducing the impact of spatial transaction costs, it remains a

significant role in the real economy, and the fact that OBOR focuses on infrastructure developments

proves its motives.

                                                                                                                         33 Embassy of The People’s Republic of China in the Republic of Mauritius, http://www.ambchine.mu/eng/zgxw/

    45  

Stages of China’s Internationalization

A systemic view of China’s internationalization process indicates that as it has developed new

economic strategies for the next stage, short-, medium-, and long-term consequences follows. China

took a gradual approach to internationalization and, step by step, extended its leverage by creating new

economic zones and bilateral/multilateral relationships with countries around the world. In the

following, I propose three stages that reflect economic policy changes in China in terms of

internationalization.

Stage 1 began with the 1978 reform, which started to reduce the barriers between Chinese cities and

the global economy. Starting with the creation of SEZs authorized by the CCP for two coastal

provinces, Guangdong and Fujian, allowed the country to create special zones to attract foreign

investors and offer concessionary tax and rents to them. Four SEZs were established, three in

Guangdong (Shenzhen, Zhuhai, and Shantou) and one in Fujian (Xiamen). I would categorize stage 1

as a short-term strategy for China compare to the later ones, as the main goal of opening up economic

policy in this stage was trade liberalization. Later, Deng Xiaoping extended the aforementioned

special privileges to other provinces, which gave Deng and other communist leaders a chance to

exploit the political advantages of particularism. As the internationalization progressed, the level of

deregulation and decentralization deepened, and by 1994, 311 cities and counties along with 114

zones had been opened to foreign investment, trade, and technology. In contrast to the tremendous

economic growth on a national level, however, China had to face the consequence of such

particularism, which was spatial inequality. To reduce this inequality, China’s reform leaders decided

to internationalize the country’s rural areas, and soon the Western Development strategy, stage 2, tried

to extend the subjected region to the countryside pushing for export-led growth in rural China, and

trying to resolve the vast inequalities created by decades of tilted development.

This started with township and village enterprises (TVEs) and state-owned enterprises (SOEs)

penetrating global markets, leading the Great Western Development strategy to broaden the subjected

countries to increase the benefits of export-led growth and lessen the regional economic gap. Then, in

stage 3, the OBOR strategy also included the western and interior regions to enhance the quality of

infrastructure; however, this occurred on a larger scale, with the association with countries around the

world. Apart from this change in scale, the most important transition was that the characteristics of

projects from each stage changed from mere trade and infrastructure extensions towards sustainable

growth. The implementation of the OBOR initiative covers Eurasia, targeting countries along the Belt

and Road. Internationality, peace, development, and cooperation are the key themes, and the structure

of global economic change has accelerated. Hence, China understands that it needs deeper integration

    46  

to survive and prosper. As OBOR aims to promote sustainable, stable growth in a peaceful

environment, it will not only generate new jobs and revenue, but can also become a long-term

platform to exchange knowledge, thoughts, culture, and religion.

To make sustainability a reality, the AIIB shares the same vision and is committed to helping the

world’s underprivileged and the environment. The bank is funding various projects, such as a power

transmission project in Bangladesh, which will help bring affordable and reliable electricity. 34 The

bank’s annual meeting this year had the theme “Sustainable Infrastructure”, focusing on strategy in the

energy area and pushing towards a low-carbon future. Along with the UNDP’s “South-South

cooperation” which promotes the practice of experience-sharing between countries and offers a range

of policy choices for different countries, China is also trying to promote a mutually beneficial and

win-win opening set up with OBOR.

3.   The Internationalization of the RMB, and the Role of the AIIB

 

China argues that the OBOR initiative and the internationalization of the RMB are strategies that

serve both its own national interests and global ones. The RMB International Report 2015, published

by the International Monetary Institute of Renmin University of China, states that another important

effect of OBOR is the internationalization of the RMB. Specifically, China has expanded its bilateral

local currency swap programs to 21 countries along OBOR. Such steps will help RMB trade

settlement increase, and be further boosted as Chinese companies pursue opportunities along OBOR.

The internationalization of the RMB is now gathering pace. For instance, in 2010, China introduced

bonds consisting of RMB, such as “dim sum bonds,” to help recycle the hundreds of billions of RMB

that sit in offshore markets such as Hong Kong. China also held hands with Russia, announcing

Moreover, that they had decided to use their own national currencies for bilateral trade instead of the

US dollar. This was followed by signing a three-year swap agreement with the United Arab Emirates

worth 35 billion RMB (USD 5.54 billion). People’s Bank of China claimed that these bilateral

agreements would boost two-way trade and investment, facilitating greater use of China’s RMB in

international trade. Scholars have predicted that if China wishes to internationalize the RMB, it is

considering establishing regional bank in order to guide small and medium enterprises to invest and

                                                                                                                         34 Xinhua News Agency, June 19, 2017 “AIIB to build a sustainable tomorrow for future generations”, https://eng.yidaiyilu.gov.cn/qwyw/rdxw/16532.htm

    47  

fund for infrastructure projects in Southeast Asian countries, settling China-ASEAN trade in RMB. It

was also been predicted that China might come to the aid of Europe, insisting on contributing at least

partly in RMB. This prediction came true when China established the AIIB.

As the above progress indicates, China has made its plan to internationalize the RMB very cleverly.

Not only did it begin to implement RMB internationalization to increase its competitiveness in

financial markets, but it also established the AIIB. The bank is key to mapping out the OBOR

initiative. The AIIB will play a critical role for China to take an economic interest and, at the same

time, to be pivotal among developing countries where there is an already existing infrastructure

market. The action plan for the OBOR initiative states that countries along the Belt and Road should

“make joint efforts to establish the Asian Infrastructure Investment Bank (AIIB).” It also states that

they will provide good credit-rating in order to issue Renminbi bond in China for those countries

along the OBOR route, and for the qualified Chinese financial institutions and companies to “issue

bonds in both Renminbi and foreign currencies outside China.” The AIIB, the New Development

Bank (NDB), and the Silk Road Fund, together with China’s policy banks, have already taken the lead

in participating in cross-border investment projects.

China has been promoting the internationalization of RMB since 2008, the year of the onset of the

global financial crisis, claiming that the weak recovery of Western economies shows that we need

another strong currency, such as the RMB, to equal the US dollar as the dominant international reserve

currency. Moreover, the RMB is increasingly accepted in international trade, and it will reduce the

costs of trade with China, facilitating trade settlement and avoiding the risks of using a third-party

currency, such as the US dollar. China hopes that this will deepen regional economic integration.

Furthermore, as the OBOR initiative progresses, China will serve as a key trade partner in the OBOR

region. With political stability and cultural prosperity, the country hopes to lead the region in

economic and financial development. Expanding the use of the RMB in this region will facilitate

trade, financing, investment, and financial transactions, which in turn will make the RMB a major

international currency.

    48  

Table IV-6: OBOR and RMB internationalization

Bilateral local currency swap RMB Settlement Bank Belarus Singapore Russia Indonesia Albania Malaysia Uzbekistan Sri Lanka Hungary Kazakhstan Russia Singapore Thailand Armenia Thailand Pakistan Serbia Qatar UAE Tajikistan Laos Malaysia Pakistan Cambodia Turkey Qatar Mongolia Ukraine Hungary

Another reason for China to push for RMB internationalization is that the process provides a great

deal of opportunity for reform. RMB internationalization is a “convenient pretext to pursue financial

liberalization and market reforms” (Thornton, 2012). Such strategy has been used by previous Chinese

leaders: for example, Premier Zhu used accession to the WTO to push through structural changes in

2001. The change includes removing the agricultural protection and opening up the services market.

There is a possibility that these factors might sway the reform-minded officials to push for financial

and exchange rate reforms using RMB internationalization.

China’s pattern of internationalization

Since its opening-up in 1978, China has been altering its economic policies and focusing on

economic prosperity to catch up with the rest of the world. With a foreign trade monopoly and

administratively set prices of the command economy, which was common in the communist country,

China had to face the consequences of not joining the world market. China soon realized that, as much

as it preferred to remain in full political control behind its closed economy, as the size of the global

market increased, so did the cost of being outside the world trading system (Hellen, Keohane, 1996).

Relative price, a liberalized market, and internationalization pressured China to open up and alter its

associated institutions. In addition, I believe that there is strong connection between China’s efforts to

resolve domestic issues and how the country came to push forward and implement the OBOR

initiative.

    49  

In Chapter 2, I reviewed the concept of internationalization and how it affects domestic policy

preferences. In general, domestic debates and coalitions are more focused on international policy

issues as internationalization progress (Hellen, Keohane, 1996). Although China opened itself up to

the global market, it did so in a strictly controlled, segmented way, so that bureaucrats did not lose

their political power, while accepting all the advantages resulting from internationalization.

Shirk(1996) explains how China presents a complex picture of the impact of internationalization on

economic policies, despite being a communist country. According to her, the 1978 policy change was

a result of strong pressure from international economic factors, and the fact that China still managed to

gradually reform its foreign trade administration is remarkable. Chinese leaders removed regulatory

constraints from specific regions, while managing to maintain those controls over other localities. The

level of openness, and which regions took advantage of preferential treatment, were determined solely

by the central government, and its policies and initiatives were implemented based on its plan. This

was highly different from what neoliberalists might have expected from a country’s reaction to

internationalization. Many scholars have defined Chinese characteristics of internationalization as

“elite driven,” “economic nationalist,” and “particularistic contracting.” All in all, China has been

consistent in showing these “controlling the opening” characteristics, though over the years the

economic reform and its regulatory barriers have slowly loosened up, especially following the 1999

WTO agreement between the US and China.

    50  

V.   Conclusion  

The aim of this thesis was to determine whether the Belt and Road initiative was implemented to

serve as an external instrument to assist in the necessary domestic rebalancing process and, if so, to

examine how the OBOR initiative is connected to China’s domestic developmental policies. In doing

so, I systemized China’s internationalization process and emphasized unique characteristics which

made this Chinese case sets apart from other internationalization occurring around the globe. From

stage one, since 1978 economic reform, China has gradually lowered regulatory barriers and

acknowledged the global market force, resulting in a competitive edge for the country and giving it

incentives for tremendous economic growth. These opportunities arose from differences in the relative

values of goods and services inside and outside of China (Keohane 1996), and other benefits deriving

from global transaction made China gain greater global links.

Next stage of China’s internationalization came with its domestic policy -Western Development

strategy- to overcome the spatial inequality caused by preferential economic policy during the first

stage, and the government decided to reform the Sate Owned Enterprises (SOEs) and increased usage

of the Special economic Zones (discussed earlier in this paper). The SOEs, which were also part of

China’s “going global” strategy, began in the mid-1990s. Deepening the level of domestic and

international policy integration which are all in line with previous policies, China finally implemented

the OBOR initiative, the stage three.

With OBOR initiative, China expects its ties with neighboring countries to its western region to

create opportunities, as OBOR consists of the same developmental projects, including infrastructure-

consisting transport, hydro plants, energy, telecommunications, and the enticement of foreign

investment, China should expect growth in the western area. The SOEs that played a vital role in

China’s overseas investments during the reform period also are expected to benefit from the OBOR

initiative. They will improve operations management, and enhance global competitiveness even

further. The OBOR project encourages the participation of enterprises from cooperating countries, but

has mapped out specific methods for SOEs. Many countries along the Belt and Road have poor

transportation and energy infrastructure, and therefore have enormous demand for improving those

sectors. Chinese enterprises have accumulated a wealth of overseas construction experience, and the

central government wants to utilize this ability and derive greater profits from participating in a larger

and much more profitable platform. The OBOR initiative could also help improve the stability of inner

regions and maritime transportation routes, countering the surge of terrorism and extremism,

transnational organized crime, and other non-traditional security threats. China’s five-year plan (FYP)

    51  

and the action plan for OBOR both state that China believes that its economic cooperation within the

OBOR framework may help address the deep-rooted causes of instability and radicalization of poor

countries that have been on the periphery of the global economic system.

I also proposed policy linkage to support my argument that OBOR is the extension of domestic

policy, presenting its 10th Five Year Plan(2001-2005) of the Great Western Development strategy, the

12th Five Year Plan (2011-2015), in addition to internationalization of the RMB. Western

development is still a major factor in China’s domestic development policy, and through OBOR,

China could add an international policy pillar for the “Go West” drive, a domestic endeavor from the

FYPs. Indeed, various papers have already analyzed China’s strategy for future development, claiming

that OBOR is driven by a variety of domestic and foreign policy challenges facing China, the idea

being that OBOR can facilitate and keep China’s economic boom alive. China’s GDP growth rate has

decreased to 7% after decades of double-digit growth, and China is now suffering from increased labor

costs, an aging population, growing energy demands, and overcapacities in manufacturing sectors.

I have shown that OBOR should be viewed as broadening the scope of China’s domestic strategy,

which I call it the “internationalization of domestic development”, turning specific economic projects

into economic collaboration projects with OBOR countries. As I have emphasized earlier on this

paper, legitimizing the internationalization of domestic development was one of the key focus during

my research. It might even seem like a normality in any diplomatic move in this day and age,

nevertheless, it is absolutely necessary to examine China’s case considering its unprecedented

influence around the globe. What also sets this case apart from others is that China is taking an

unordinary path by initiating the OBOR, a first multilateral cooperation China has established, being

strictly China-centric geographically and strategically. Such characteristics have been listed more in

detail earlier on in this paper. I must also point out how most domestic development policies made

since the 1978 reform are mostly China implementing its national strategy to benefit from the

international, liberal market economy. OBOR will create even more favorable external conditions for

related internal strategy which gives strong motivation for China to endeavor after the success of the

initiative.

    52  

Discussion

China is now less mercantilist and more comfortable with lowering the barriers to global market

forces. It has moved beyond partial integration to adjust its external behavior and now strives to

become an influential leader, creating a new and improved international system. China is more

involved in a market economy, planning to increase operational efficiency in a modern economic

system, and to place its resources where they are most needed. Now that China is implementing the

Belt and Road initiative, I have tried to reevaluated and redefined China’s internationalization.

The fundamental characteristics of regulating internationalization have not changed. OBOR is an

initiative that aims to create a new economic entity of an open platform for all parties willing to

contribute to global connectivity, but still with China strategically planning every step seems to be the

evidence of this. The internationalization of the world economy has had significant impact on

domestic politics.35 This paper tried to analyze China’s internationalization process as part of domestic

development having its academic purpose. However, whether this process will in fact be beneficial to

China’s domestic development in the longer term while fulfilling OBOR’s claimed goal is uncertain,

with legitimate questions left that require further investigation. There is no doubt that China will

continue to promote coordinated and interactive development projects between regions through the

implementation of OBOR for the country’s regional development and for major function-oriented

zones, enhancing the coordination of regional development. However, it is too early to estimate any

clear and concrete consequences of China’s systemic progress.

In addition, the OBOR initiative faces several immediate challenges without the participation of the

US and Japan in the AIIB. China will need to consider improving its relationship with these two

countries to improve the AIIB’s credit rating and legitimacy. Many participants from the Asian region

have poor credit, which means that projects may be difficult to pursue. Moreover, because consensus

is reached in the top levels of government while implementation is done at the local level, it could be

difficult to obtain the full support and cooperation from local governments. Security will be another

crucial challenge for OBOR: the Kashgar-Gwadar economic corridor will come across what is

consider to be conflict-ridden territories.

Nevertheless, OBOR initiative is a strategic necessity for the resilience of China’s development. If

successfully implemented, OBOR could have tremendous political and economic impact, given the

                                                                                                                         35  Keohane, Robert O. and Miler, Helen V. 1996. INTERNATIONALIZATION AND DOMESTIC POLITICS. Cambridge University Press.  

    53  

dominant role of developing economies in China’s growth and the huge potential of the Global South.

The initiative embodies the Chinese leadership’s goal of making use of the interplay between bold

internal reforms and external rebalancing acts through the process of internationalizing domestic

development. Scott Kennedy, the deputy director of the Freeman Chair in China Studies at Center for

Strategic and International Studies(CSIS), stated in an interview that OBOR has become an integral

part of China’s economic policy to cushion the effect of the domestic economic downturn and “to help

make use of China’s enormous industrial overcapacity and ease the entry of Chinese goods into

regional markets.” 36This could pose a challenge for China because there is already a deficit of trust

between it and the regional and peripheral powers, who harbor suspicions about China’s intentions and

its egoistic goals behind OBOR. China needs to try to overcome those challenges and convince the

respective countries that OBOR goes beyond internationalizing its domestic development, that if this

cooperative relationship continues, it would share the prosperity that China will achieve, and that it

could work towards deeper integration economically and politically which will result in fostering

regional peace and stability.

 

 

 

 

 

 

 

 

 

 

 

 

 

                                                                                                                         36 By the Center for Strategic and International Studies. 2015. Lim Wen Xin interviewing Scott Kennedy “Building China’s “One Belt, One Road””, Assessed in April 2015, https://www.csis.org/analysis/building-china’s-“one-belt-one-road”

    54  

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33 Xinhua News Agency, June 19, 2017 “AIIB to build a sustainable tomorrow for future generations”, https://eng.yidaiyilu.gov.cn/qwyw/rdxw/16532.html

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논문초록

중국은 1978 년 경제개혁 이후 점진적으로 세계시장에 국경을 개방하였으며 국내와 국외 상품, 서비스의 상대적 가치의 차이로 인해 엄청난 경제 성장을 경험하게 되었다. 국제적인 거래의 증가로 인해 중국은 더욱 다양한 국제적 네트워크를 형성하게 되었으며, 이는 중국에 대한 다른 국가들의 이해관계가 급변하는 결과로 이어졌다. 중국은 이제 비교적 덜 중상주의적인 입장으로 국제시장에 무역장벽을 지속적으로 낮추고 있다. 이제 중국은 대외정책의 부분적 통합을 넘어 새롭고 개선된 국제시스템을 선도하는 영향력 있는 리더가 되고자 한다. 중국의 국제화 과정은 아직 국가중심적이기는 하나, 점차 자유시장경제와 권위주의적 정치구조를 혼합한 형태로 세계자유시장에 적응하고 있다.

현재 중국이 일도일로 (OBOR) 이니셔티브를 통해 아시아에서 유럽까지, 그리고 더 나아가 아프리카 지역의 국가들에게까지 세계경제발전의 새로운 청사진을 제공하는 바, 중국의 국제화에 대한 재평가와 개념적 재정립이 필요하다. 중국의 일대일로(OBOR) 이니셔티브는 비록 포괄적이고 개방적인 국제전략으로 인식되고 있지만 중국의 국내전략의 외연확대라는 관점에서 분석해야 할 필요가 있다. 따라서 본 논문은 국내개발의 국제화 프레임을 통해 중국의 국내개발이 일대일로 (OBOR) 이니셔티브와 맞물려 중국의 대외적 국제화를 촉진하는 동시에 대내적 균형을 조정하는 도구로서 어떻게 그리고 왜 활용되고 있는지를 체계적으로 분석하고자 한다.

본 논문은 중국의 경제개혁을 경제특구시기(SEZs), 서부대개발시기, 국영기업(SOEs) 추진시기 등 세 단계의 국내개발정책과 순차적으로 비교 분석하였다. 마지막으로 일대일로와 세계경제에서 중국의 새로운 역할이 의미하는 바를 파악하는 것을 끝으로 결론을 짓고자 한다. 다만, 일대일로 (OBOR) 정책이 시행 초기단계인 바, 중국의 정책에 대한 체계적인 결과 예측을 위해서는 추가 연구가 반드시 필요하다는 점을 미리 밝힌다.

키워드: 일대일로, 중국, 국내개발, 개발정책, 국제관계 학번: 2011-22380